What Is the Child and Dependent Care Credit?
The Child and Dependent Care Credit is a nonrefundable tax credit offered to taxpayers who pay out-of-pocket expenses for childcare. The credit offers relief to individuals and spouses who pay for the care of a qualifying child or a disabled dependent while they work or look for work. The percentage of eligible expenses that qualify for the tax credit varies depending on the taxpayer’s income level, and there is a limit on the total dollar amount of expenses that qualify as well.
- While there’s no income restriction on claiming the credit, those with lower income levels can claim a higher percentage of eligible expenses.
- In addition to daycare, tax filers can also claim other expenses, such as babysitters, day camps, and before- and after-school programs.
- You are not permitted to include expenses that were paid with pretax dollars, including those coming from a flex spending account.
Understanding the Child and Dependent Care Credit
A tax filer may be able to claim the child and dependent care credit if they paid someone to care for a child under the age of 13. One can also qualify if they paid for the care of a spouse or other dependent adult, as long as that individual is not capable of self-care and lived in the taxpayer’s home for at least half of the year.
Unlike deductions, tax credits represent a dollar-for-dollar reduction in one’s tax liability. However, because the child and dependent care credit is a nonrefundable credit, it has no value if you do not owe any income tax for the year. It also has a reduced value if your total tax liability is less than the full value of the credit, as it can only reduce your tax liability to zero.
When calculating the credit, you can include up to $3,000 of eligible expenses if you have one qualifying dependent, or up to $6,000 if you have two or more dependents. The amount of the actual credit that you’re allowed to claim is from 20% to 35% of those allowable expenses, depending on your earned income and adjusted gross income (AGI).
The American Rescue Plan made a number of changes to the child tax credit for the 2021 tax year only. The law increased the child tax credit to $8,000 for one qualifying individual ($16,000 for two or more qualifying individuals), increased the maximum credit to 50% of the taxpayer's employment-related expenses, raised the income level at which the child tax credit begins to phase out to $125,000, and makes the credit fully refundable.
While there’s no cap on the amount of income you can earn and still use the credit, higher-earning individuals and spouses can claim a smaller percentage of eligible expenses. In 2020, taxpayers whose AGI is below $15,000 a year can claim 35% of their applicable care costs. That percent goes down by one percentage point for each additional $2,000 of earned income until reaching a floor of 20% for those with an AGI of $43,000 or more.
The number of eligible expenses that you can claim is limited to the amount of earned income you generate from work. For married couples, that limit applies to the amount of income earned by the spouse who makes less money. In most cases, if one spouse does not earn income through employment, then the couple may not use the Child and Dependent Care Credit (exceptions exist for nonworking spouses who are full-time students).
To claim the credit, you must submit Internal Revenue Service (IRS) Form 2441, Child and Dependent Care Expenses, with your Form 1040. Based on your income, the form will identify the percentage of allowable child or dependent care expenses that you are permitted to claim for your credit.
All versions of Form 2441 are available on the IRS website.
Who Can Claim the Credit?
To claim the credit, you or your spouse must have earned income—that is, money earned through employment—and you must have paid for the care so that you can work or search for work. Married spouses need to file a joint return to claim the credit or show that they meet special requirements listed in IRS Instructions for Form 2441.
The IRS allows parents to claim a fairly wide range of expenses, including those for:
- Babysitters, as well as housekeepers, cooks, and maids who take care of the child
- Day camps and summer camps (overnight camps are not eligible)
- Before- and after-school programs
- Nurses and aides who provide care for a dependent who is disabled
- Nursery school or preschool
While working parents can claim educational expenses at the pre-kindergarten level, costs related to kindergarten and above do not qualify. Similarly, costs related to summer school or tutoring are not eligible for the credit.
There are special rules for divorced parents. The custodial parent is the one eligible to take the child and dependent care credit, whether or not the other parent claims the child (or children) as a dependent on their tax return. According to the IRS, the custodial parent is the one who had the child the greater number of nights in the tax year. If both parents shared an equal number of nights, then it is the one with the higher AGI. For more details relating to custody arrangements and divorced parents, please see page 4 of IRS Publication 503.
Except under limited circumstances, the caregiver may not be a member of your immediate family. Specifically, the person providing care cannot be your spouse or the parent of the child whose care you are paying for if they are under 13 years of age. Nor can the caregiver be a child of yours under the age of 19 or a dependent of yours for tax purposes.
When claiming the credit, filers need to provide the caregiver’s name, address, and Social Security number. If it’s a daycare or preschool, then filers must provide their tax identification number.
Child and Dependent Care Credit vs. Flexible Spending Account
You may not use the child and dependent care credit for expenses that were reimbursed by your employer, or that you paid with pretax dollars, including funds held in a flexible spending account (FSA). In some cases, using an FSA—if one is available through your employer—provides a larger tax benefit. That’s particularly true for those in higher tax brackets, for whom the ability to pay with pretax dollars represents a bigger tax reduction.
The 2021 dependent care FSA contribution limit was increased by the American Rescue Plan to $10,500 for single filers and couples filing jointly (up from $5,000 in 2020) and $5,250 for married couples filing separately (up from $2,500 in 2020). This increase was a one-time exception implemented by the American Rescue Plan; in 2022, the limit will revert to $5,000 for single filers and couples filing jointly. Money in these FSAs is withheld from your paycheck on a pretax basis and placed into a non-interest-bearing account that can be used for eligible expenses.