Household and Dependent Care Credit for Working Families

The Child and Dependent Care Credit is a federal tax benefit that helps working individuals manage the costs of care for a child or another qualifying person, allowing them to be employed or seek employment. The credit directly reduces the amount of tax owed. This is a non-refundable credit, meaning it can lower your tax liability to zero, but you will not receive any of it back as a refund if the credit is larger than your tax bill.

Determining Your Eligibility

To claim the credit, you must pass several tests. The first is the qualifying person test. A qualifying person is your dependent child who was under the age of 13 when the care was provided. It can also be your spouse or another dependent of any age who was physically or mentally incapable of self-care and lived with you for more than half of the year.

Another requirement is the earned income test. You, and your spouse if filing a joint return, must have earned income during the tax year. Earned income includes wages, salaries, tips, and net earnings from self-employment. It does not include income from sources like pensions, annuities, or unemployment benefits. A special rule applies if one spouse is a full-time student or is incapable of self-care, as they are treated as having earned income for this test.

The work-related expense test requires that you paid care expenses so that you (and your spouse, if married) could work or look for work. If you are married, you must generally file a joint tax return. An exception exists for certain married individuals who are legally separated or who live apart from their spouse for the last six months of the tax year and meet other criteria. You must also have resided in the United States for more than half of the year, unless you are military personnel stationed abroad.

Identifying Qualifying Care Expenses

Qualifying expenses are those paid for the care of a qualifying person to enable you to work or look for work. Common examples include:

• Payments to daycare centers, licensed child care facilities, babysitters, and nannies
• Costs for before- or after-school care programs for a child under 13
• Summer day camps, as their main purpose is care and well-being
• Household services, such as those provided by a housekeeper or cook, that are at least partly for the well-being and protection of the qualifying person

If household services are also for other purposes, such as cleaning a part of the house not used by the qualifying person, you must allocate the expense. Only the portion attributable to care can be claimed.

It is important to understand what does not count as a qualifying care expense. The cost of tuition for a child in kindergarten or a higher grade is an education expense and does not qualify. Similarly, the cost of overnight camps does not qualify. You cannot claim expenses for care provided by your spouse, the parent of your qualifying child, or another person you can claim as a dependent.

Calculating the Credit Amount

There is a dollar limit on the amount of work-related expenses you can use to figure the credit. For your 2024 tax return, you can use up to $3,000 of expenses for one qualifying person or up to $6,000 for two or more. These are the maximum expense amounts you can consider, not the amount of the credit itself.

The amount of qualifying expenses cannot be more than your earned income for the year. If you are married and file a joint return, the expenses are limited to the earned income of the lower-earning spouse. For example, if one spouse earns $50,000 and the other earns $4,000, the maximum amount of expenses you could use for the calculation would be $4,000.

After determining your allowable expenses, you apply a percentage to that amount to find your credit. The percentage is based on your Adjusted Gross Income (AGI) and ranges from 35% down to 20%. For taxpayers with an AGI of $15,000 or less, the rate is 35%, while it reaches 20% for those with an AGI of $43,000 or more.

If you received dependent care benefits from your employer, these must be subtracted from your total qualifying expenses before you calculate the credit. These benefits, which may appear in Box 10 of your Form W-2, are tax-free. For instance, if you have $6,000 in care expenses and received $5,000 in tax-free benefits from your employer, you can only use the remaining $1,000 of expenses to calculate your credit.

Required Information and Claiming the Credit

For each individual or organization that provided care, you will need their full name, address, and Taxpayer Identification Number (TIN). For an individual provider, the TIN is typically their Social Security Number (SSN); for a business, it is an Employer Identification Number (EIN). You can request this information from your provider using Form W-10, Dependent Care Provider’s Identification and Certification.

Failure to provide accurate provider details can result in the disallowance of your credit by the IRS. You will also need the Social Security Number for each of your qualifying dependents. Keeping detailed records of your care payments throughout the year will help ensure you have the correct expense totals when it is time to file.

You must use Form 2441, Child and Dependent Care Expenses, to report your expenses and calculate the amount of your credit. This completed form must then be submitted along with your Form 1040, U.S. Individual Income Tax Return. The instructions for Form 2441 guide you through the calculation process.