Do You Get Money Back for Daycare on Taxes?

Paying for daycare can be expensive, but tax benefits can help offset some of the costs. The IRS offers credits that reduce tax liability for eligible taxpayers who meet certain criteria. Understanding these tax breaks can impact how much you owe or receive at tax time.

Requirements for Claiming

To qualify, daycare expenses must be work-related. You or your spouse, if filing jointly, must have earned income, which includes wages, salaries, tips, and self-employment earnings. Investment income and Social Security benefits do not count. Exceptions apply if one spouse is a full-time student or incapable of self-care.

The care must allow you to work or look for work. Occasional babysitting for personal reasons does not qualify. The provider cannot be your spouse, the child’s parent, or another dependent claimed on your tax return. Payments to a relative may qualify if they are not your dependent.

Eligible arrangements include daycare centers, in-home providers, and summer day camps. Overnight camps and educational tuition do not qualify. If using a daycare center, it must comply with state licensing requirements. Keeping records of payments and the provider’s name, address, and taxpayer identification number (TIN) is necessary for claiming the credit.

Qualified Dependents

The IRS defines a qualified dependent as a child under 13 when care was provided. If the child turns 13 during the tax year, expenses before their birthday may still qualify.

The dependent must live with the taxpayer for more than half the year. Temporary absences, such as school or vacation, do not affect eligibility if the child’s primary residence remains the same. In shared custody cases, only the custodial parent—the one the child lives with most—can claim the credit. A non-custodial parent cannot claim daycare expenses, even if they contribute financially.

Dependents are not limited to children. A spouse or relative who is physically or mentally unable to care for themselves may also qualify if they live with the taxpayer for more than half the year. The IRS defines someone as incapable of self-care if they cannot dress, clean, or feed themselves without assistance or require constant supervision.

Covered Daycare Costs

Qualifying expenses must be directly related to the care and supervision of a dependent while the taxpayer works or seeks employment. This includes payments to daycare centers, in-home caregivers, and summer day camps, provided the primary purpose is custodial care rather than education. Before- and after-school programs also qualify if they extend beyond the standard school day.

For families employing a nanny or babysitter, wages paid to these caregivers may be eligible, but only if they are classified as household employees rather than independent contractors. Employers must report these wages and pay payroll taxes. Keeping detailed payroll records and tax filings is necessary to avoid penalties.

Some employers offer dependent care flexible spending accounts (FSAs), allowing employees to set aside pre-tax dollars for childcare. However, expenses reimbursed through an FSA cannot be claimed for tax credits. Tracking FSA contributions and out-of-pocket expenses is essential to avoid penalties or a denied credit.

Effects on Tax Refund

Claiming daycare expenses can lower tax liability through the Child and Dependent Care Credit (CDCC), a nonrefundable credit that reduces the amount owed to the IRS. The credit covers 20% to 35% of qualifying expenses, depending on adjusted gross income (AGI). Households earning $15,000 or less receive the maximum 35% benefit, while those above $43,000 qualify for the minimum 20%. Since the credit is nonrefundable, it can reduce tax liability to zero but does not increase a refund beyond what was paid in.

For those also eligible for the Earned Income Tax Credit (EITC), the tax benefit can be significant. Unlike the CDCC, the EITC is refundable, meaning any excess amount is returned as a refund. While these credits function independently, combining them can further reduce tax burdens for lower-income households. The impact varies based on income, number of dependents, and other deductions.

Filing Process

Claiming daycare expenses requires accurate documentation and adherence to IRS guidelines. Taxpayers must complete Form 2441, Child and Dependent Care Expenses, and attach it to their Form 1040. This form calculates the allowable credit based on income, eligible expenses, and the number of dependents receiving care. The maximum qualifying expenses are $3,000 for one dependent or $6,000 for two or more, with only a percentage of these costs eligible for the credit.

To complete Form 2441, taxpayers must provide the care provider’s name, address, and taxpayer identification number (TIN) or Social Security number. If the provider is a daycare center, it must comply with state regulations. Failing to include this information can result in a denied credit. Keeping receipts, bank statements, and written agreements with the provider ensures compliance in case of an IRS audit. Those using tax software will be prompted to enter these details, but manual filers must ensure accuracy to avoid delays.