How to Claim the Childcare Tax Credit
Paying for care for a child or dependent so you can work? This guide clarifies the details behind turning those necessary expenses into a valuable tax reduction.
The Child and Dependent Care Credit is a federal tax benefit designed to help offset the costs of care for a qualifying person, allowing a taxpayer to work or actively look for work. Its purpose is to provide financial relief for families who pay for care services to maintain employment. This nonrefundable credit can reduce your final tax liability but will not result in a refund on its own.
Qualifying for the Credit
To claim the Child and Dependent Care Credit, you must satisfy several tests. The first is the qualifying person test, which defines who the care is for. A qualifying person is your dependent child who was under age 13 when the care was provided, or a spouse or other dependent who was physically or mentally incapable of self-care and lived with you for more than half 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. A spouse who was a full-time student or incapable of self-care is treated as having earned income for each month they meet these conditions, which can help the working spouse qualify for the credit.
Finally, you must meet the work-related expense test, which requires that you paid for care so that you (and your spouse, if married) could work or look for work. If you are married, you must file a joint tax return to claim the credit. An exception exists for those considered unmarried for tax purposes, which involves living apart from the spouse for the last six months of the year and maintaining the household for the qualifying person.
Identifying Qualifying Expenses
The total work-related expenses you can use are capped at $3,000 for one qualifying person and $6,000 for two or more. These are the maximum expense amounts used in the credit calculation, not the amount of the credit itself. If you receive dependent care benefits from your employer, such as through a flexible spending account (FSA), you must reduce your qualifying expenses by the amount of those tax-free benefits.
Eligible expenses include payments for care inside or outside your home to providers like a daycare facility, babysitter, or nanny. The cost of a day camp can also qualify, even if it specializes in an activity like sports. Costs that are not eligible include tuition for kindergarten and higher grades, overnight camps, or expenses for food and clothing. Payments made to your spouse, the parent of your qualifying child, or your own child under age 19 cannot be included.
Calculating Your Credit Amount
The Child and Dependent Care Credit is calculated as a percentage of your qualifying work-related expenses, and the specific percentage depends on your Adjusted Gross Income (AGI). The credit is worth between 20% and 35% of your allowable expenses, with the percentage decreasing as your income increases.
For taxpayers with an AGI of $15,000 or less, the credit is 35% of their qualifying expenses. This percentage gradually decreases by one point for each $2,000 that AGI exceeds $15,000. For example, a taxpayer with an AGI between $15,001 and $17,000 would use a 34% rate. This phase-down continues until the AGI exceeds $43,000, at which point the credit percentage remains at a flat 20%.
To illustrate, consider a taxpayer with an AGI of $50,000 and one qualifying child, who paid $4,000 in daycare fees. Their qualifying expenses are limited to the $3,000 maximum for one child. Because their AGI is over $43,000, their credit rate is 20%. The final credit would be $600, which is calculated as 20% of $3,000.
Information and Forms Needed to Claim the Credit
For each person or organization you paid for care, you will need their full name, address, and Taxpayer Identification Number (TIN). A provider’s TIN is either a Social Security Number (SSN) for an individual or an Employer Identification Number (EIN) for a business. You must obtain this information from your provider, as they are required by law to furnish it to you.
The information you collect is reported on IRS Form 2441, Child and Dependent Care Expenses. Part I of the form is where you list the details for each care provider, including their name, address, TIN, and the total amount you paid them. The form also requires you to list the names and Social Security Numbers of each qualifying person for whom you are claiming expenses.
How to File for the Credit
The completed Form 2441 must be attached to your Form 1040, 1040-SR, or 1040-NR. The credit you calculated on Form 2441 is then transferred to the appropriate line on your main tax return, where it will reduce your overall tax liability.
If you use tax preparation software to e-file your return, the program will guide you through questions about your child and dependent care expenses. Based on your answers, the software automatically populates Form 2441 and attaches it to your electronic submission.
For those who file a paper return, you must physically attach your completed Form 2441 behind your Form 1040. Keep copies of Form 2441 and all supporting documents, such as receipts from your care providers, with your tax files. These records are necessary in the event the IRS has questions about your claim.