Child care costs can place a significant financial burden on families. A 2018 survey conducted by Care.com indicated that it’s literally unaffordable for seven out of 10 families, and that one out of three of them spend 20 percent or more of their household income on this cost.
Fortunately, federal law offers a little relief in the form of the child and dependent care credit. No, you won’t get an income tax break for dropping your child with the sitter so you can grab a little downtime from parenting. The tax credit only applies to the costs of care while you work or look for a job. But care can be provided at your home or at another home or establishment, and it doesn’t have to be just for your child – disabled adult dependents are eligible too.
Who Can Claim the Child and Dependent Care Credit?
The Internal Revenue Service doesn’t hand out tax breaks lightly, so there are a lot of qualifying rules here. First, your qualifying dependent care expenses cannot be more than your earned income, or your spouse’s earned income if you’re married, whichever is less.
But there’s a wrinkle to this rule. If your spouse is a full-time student for at least five months out of the year or is disabled, his income might be negligible if he has any at all. In these cases, the IRS will waive this requirement.
You Must Have Earned Income
You – and your spouse if you're married – must both have earned income from a job or self-employment, assuming that your spouse isn’t disabled or a student. Investment income won’t qualify you.
Your spouse must also be unavailable to care for your child, either because he’s working, looking for work, disabled or he’s a student. If he’s disabled or a student, the IRS will assign him “earned income” of $250 a month if you have one child, or $500 a month for two or more children. This might increase in 2020, but the numbers aren't adjusted for inflation so there's no guarantee.
You Must Be Your Child’s Primary Caretaker
You must be the one who primarily cares for your child when you’re home. This is a roundabout way of saying that you’re the custodial parent if you’re separated or divorced. In fact, you can claim the child and dependent care credit if you’re the custodial parent even if you can’t claim your child as a dependent for general tax purposes because his other parent has the right to do so.
Your Filing Status Matters, Too
You generally can’t claim this credit if you’re married filing a separate return, although the IRS does offer a loophole here, too. You can do so if the following requirements are met:
- You and your spouse didn’t live together at any time during the last six months of the year.
- You personally paid more than half the cost of maintaining your home during the tax year.
- Your home is the main residence of both you and your qualifying child or dependent.
Otherwise, you're limited to the single, head of household, married filing jointly or qualifying widow(er) filing statuses.
Qualifying Rules for Dependents
Some rules apply to your dependents as well – those you’re paying someone else to care for while you work.
Basically, your dependent must be incapable of caring for himself while you head off to earn a living. He wouldn’t be safe if left alone, either because he’s physically or mentally disabled or because he’s still a child. The IRS takes the position that teenagers are perfectly capable of self-care, so your child must be under age 13 to qualify, provided he’s not disabled.
Your spouse would qualify if she can’t take care of herself because she’s disabled, but you must have lived together for at least six months out of the tax year to claim the credit under this rule. The same six-month rule applies to other adult disabled dependents as well.
A Few Other Technicalities
You must actually claim your dependent on your tax return, even though the TCJA has eliminated personal exemptions from the tax code. But the IRS gives you some wiggle room here as well. You don’t have to actually claim her if you would have been able to do so except she didn’t meet IRS income rules for dependents, she filed a joint return with a spouse or she was claimed as someone else’s dependent.
Finally, your dependent must have a valid tax identification number, typically a Social Security number.
Qualifying Rules for Care Providers
The IRS wants to know whom you’re paying to care for your qualifying child or dependent, so you must also provide her name, address, Social Security number or employer identification number on your tax return. An exception exists if the caregiver is a tax-exempt organization. In this case, you must simply name it and provide the address. The IRS will let you dodge this requirement if you can establish that you showed “due diligence” in trying to get this information but failed – in other words, you tried your best.
And there are rules for who you can’t pay to watch your child or dependent. The caregiver can’t be:
- Your spouse
- Your child’s other parent
- Your older child who is younger than 19
- Any other dependent you claim on your tax return
Other than that, it can be a daycare center, nursery school, a private babysitter or even a summer camp, although overnight camps don’t qualify. Schools or tutors don’t qualify, either, unless the school specifically provides an after-school program so your child doesn’t have to go home to an empty house at the end of her school day.
The nature of the expenses you’re paying matters as well. Perhaps surprisingly, summer camps count even if they’re sports-related or hooked to some other type of recreational activity, as long as your child is going there because you’re unavailable while you work or look for work.
You must separate out the cost of that after-school program from the tuition portion of your payment to the school, however. Only the program counts toward the tax credit. And you can’t include transportation costs to and from the care facility.
Read More: How to Pay a Relative for Childcare
How Much Is the Credit? Expense Limits
So now you’ve determined that you, your care provider and your dependent are all eligible. How much is your tax credit? That depends. The amount you might be able to claim depends on your income and your care expenses.
Unfortunately, you can’t claim a credit for all your care expenses. You’re limited to a percentage of up to $3,000 in costs for one child or dependent, or $6,000 for more than one.
But that’s $6,000 in overall costs, not necessarily $3,000 per dependent. For example, it might cost you $4,000 for one child, while your other dependent’s care costs you $1,500. You’re not limited to $4,500 – $3,000 for the first child and $1,500 for the other. Rather, you have $5,500 in qualifying expenses: $4,000 plus $1,500 toward the cumulative $6,000 limit for two or more dependents.
Now Multiply Your Expenses by That Percentage
The exact percentage you’d use is determined by your adjusted gross income, but in no case is it more than 35 percent. And that 35 percent rate only applies to AGIs of less than $15,000.
The largest credit anyone can receive would therefore be 35 percent of the full $6,000 limit for two or more dependents, or $2,100. The 20 percent calculation rate applies to AGIs of $43,000 or more. The rate decreases in 1 percent increments across this income range, from AGIs of less than $15,000 to $43,000 or more. For example, if your AGI is $30,000, your percentage rate would be 27 percent.
At least this tax credit isn’t subject to income-based phaseout rules the way so many other tax credits are. In other words, it won’t be off-limits to you if you earn too much. It will just become less and less until it bottoms out at 20 percent for incomes of $43,000 or more.
A Calculation Example
Let’s say you’re paying for care for one child. The total cost to you for the tax year is $8,000. You can begin your calculations with $3,000 of that figure. There’s no tax benefit for spending the remaining $5,000.
Did you have earned income for the year in excess of $3,000? If so, you can still use that $3,000 number. Otherwise, if you or your spouse earned less than that, your qualifying expenses reduce even more. Maybe you’re married and your spouse earned only $2,500 that year. Your qualifying expenses would drop to $2,500, the lesser of these two numbers.
Now you can apply the percentage based on your AGI. If you qualify to claim 25 percent, your child and dependent care tax credit is $625, or 25 percent of $2,500.
The Effect of Employee Benefits
Unfortunately, we’re not done subtracting from that $3,000 or $6,000 base figure yet. These numbers are also reduced by any dependent care benefits you might have received from your employer.
This rule applies if the benefits were not included as part of your taxable income on your W-2 Form, or if you contributed your own pretax dollars to a flexible spending or other similar account. You can generally exclude up to $5,000 of these benefits from your taxable income under the terms of the Internal Revenue Code. Doing both that and claiming the child and dependent care credit, too, would be like double-dipping into the generosity of the IRS.
You should be able to identify any such amounts in box 10 of your W-2.
Claiming the Credit
The IRS obligingly provides a sort of worksheet to help you figure all this out and come up with the correct amount of the child and dependent care tax credit you can claim. It’s included on Form 2441, which you must complete and submit with your tax return to claim the credit. All the applicable percentages and income limits are listed here.
You can also check Publication 503 on the IRS website if you’re still having a problem figuring out the rules for dependents and expenses.
Even after you go through all this work, the child and dependent care tax credit can only reduce or eliminate your tax liability – what you owe the IRS for the year. It’s not a refundable credit. In other words, the IRS won’t be sending you a check for the difference if there’s any credit left over after it reduces your tax debt to zero.
- IRS: Topic Number 602 – Child and Dependent Care Credit
- TurboTax: Deducting Summer Camps and Daycare
- TurboTax: The Ins and Outs of the Child and Dependent Care Tax Credit
- H&R Block: Child and Dependent Care Credit
- Bankrate: The IRS Helps Pay for Child and Dependent Care Costs
- Tax Foundation: Family Provisions in the New Tax Code
- Care.com: This Is How Much Child Care Costs in 2018
- IRS: About Form 2441
- IRS: About Publication 503
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.