Credit for Child and Dependent Care Expenses
You can claim a credit for child or dependent care expenses incurred when either working or looking for employment. The credit equals a percentage of up to $3,000 of expenses for 1 child and $6,000 for 2 or more children.
Taxpayer and Dependent Eligibility
A taxpayer must maintain a household for a dependent younger than 13 or one who is physically or mentally incapacitated. Married taxpayers must file a joint return to be eligible for this credit. Both spouses must work at least part-time, unless one is physically or mentally incapacitated. The presumption is that the stay-at-home spouse can watch the children.
The credit is not available if neither spouse works, since presumably they can take care of their dependents themselves. If divorced or separated, then the parent who lived with the child the longest is entitled to the credit even if the other parent can claim the child as a dependent.
If a married couple is separated, then the spouse who can claim the dependent care credit must satisfy these requirements:
- she maintained the household of the qualifying person for more than half the year;
- she furnished more than 1/2 the cost of maintaining the household for the tax year;
- the other spouse was not living in the household during the last 6 months of the tax year.
If the above tests are satisfied, then the taxpayer is treated as unmarried, and the other spouse's income or employment status is irrelevant.
The credit is allowed for qualifying children or relatives. If the qualifying relative is not a minor, then the relative must be incapacitated physically or mentally, meaning that they cannot function in life without help. The credit can be claimed even if the qualifying relative has gross income exceeding the personal exemption for that tax year. The credit can be claimed for a qualifying relative even if a caregiver and his spouse, if filing jointly, can be claimed as a dependent by another taxpayer.
Tip: Although tax credits are generally more valuable than tax deductions, for anyone making more than $43,000, the dependent care credit is a maximum of 20% of qualified dependent care expenses. Therefore, most higher income taxpayers will benefit more by taking a tax deduction rather than claiming the credit.
Additionally, if you can make salary reduction contributions to a reimbursement account, then that may yield larger tax savings than the dependent care credit since it will lower state, local, and federal taxes, including payroll taxes and may also reduce your income enough to allow a larger IRA deduction if your contribution is limited by the deduction phaseout rule based on income.
Eligible Dependent Care Expenses
Most expenses incurred for dependent care are added to calculate the credit, including expenses incurred in the home, such as payments for a housekeeper, and also certain out-of-home expenses.
For a child under age 13, outside-the-home care costs include costs associated with a day care center, day camp — but not overnight camps — nursery school, or the home of a babysitter. These expenses are also qualified for incapacitated dependents, regardless of age, if they spend at least 8 hours a day in the taxpayer's home regularly, not including temporary absences, such as for vacation.
Other qualifying expenses include the FICA (Social Security and Medicare) and FUTA (unemployment) taxes on the housekeeper's wages, and the cost of ordinary domestic services, such as cooking, cleaning, and laundry that are expended at least partly for the qualifying person. However, expenses for the dependent's maintenance, such as for food and clothing are not qualified expenses. The cost of kindergarten or higher grades, unlike nursery school, also does not qualify nor can healthcare costs that are claimed as medical expenses be included in calculating the credit.
If the child becomes 13 during the tax year, then all child care expenses up to the maximum allowable can be used to calculate credit. There is no proration.
Payments to a relative for childcare are ineligible if the relative is a dependent of the taxpayer, a child of the taxpayer under age 19 at the end of the tax year regardless of whether they are a dependent of the taxpayer, or the taxpayer's spouse. In other words, you can't deduct expenses that you pay to your own family.
Requirements for Claiming the Child and the Dependent Care Credit
You and your spouse (unless disabled or a full-time student) had earned income, income earned from work or self-employment, during the year.
The care was for one or more qualifying persons. A qualifying person is:
- your dependent, younger than age 13 when the care was provided
- a spouse unable physically or mentally to care for themselves and lived with you for more than half the year
- your dependent who was physically or mentally unable to care for themselves and who lived with you for more than half the year
- the requisite time for living with you is satisfied if the person was born or died during the tax year and lived with you for more than half the time they were alive during the tax year.
- Someone you could have claimed as a dependent, but could not because:
- they received gross income exceeding the personal exemption
- they filed a joint return
- either you or your spouse, if filing jointly, could be claimed as a dependent by someone else
You paid the expenses so you could work or look for work.
Only expenses paid with taxable income while the person was qualified counts.
- Example. Expenses paid until your child turned 13. Expenses paid afterward do not count.
- The expenses were not reimbursed, such as by a state social service agency.
- Excluded or deducted care expenses do not qualify for the credit.
The payments were not made:
- to someone you or your spouse could claim as a dependent
- to your child, stepchild, or foster child who was younger than age 19 by the end of the year
- to a person who was your spouse at any time during the year
- to the parent of a qualifying person who is your qualifying child younger than age 13
Filing status. You are:
- single
- married, filing a joint return
- still married, but you meet the requirements to be considered unmarried:
- you filed a separate return
- your home was the home of the qualifying person for more than half the year
- you paid more than half the cost of keeping up your home for the year
- some example expenses: rent, utility charges, mortgage interest, property taxes, home repairs, home insurance, and food eaten at home
- your spouse did not live in your home for the last 6 months of the year
Information about the provider.
- You know the care provider's name, address, and taxpayer identification number …
- use Form W-10, Dependent Care Provider’s Identification and Certification to get the information or
- get a copy of the provider's Social Security card
- if your provider is your household employee, provide a copy of your provider's completed Form W-4, Employee's Withholding Certificate
- get a copy of a statement from your employer if the provider is your employer's dependent care plan or
- a printed letterhead or invoice showing the provider's information
- … or you made reasonable attempts to get this information. If the provider refuses to give you the information, then:
- Report whatever information you have, on Form 2441.
- Enter "See Attached Statement" in the columns asking for the missing information.
- Write your name and Social Security number on the attached statement, explaining that your request for the information was refused by the provider.
Calculating the Dependent Care Credit
Because the dependent care credit is a nonrefundable tax credit, it can only offset ordinary income tax liability — not payroll tax liability — so the credit could be limited by earnings. Furthermore, the percentage of expenses used to calculate the credit depend on adjusted gross income (AGI).
For a married couple, the credit percentage depends on the AGI of the lower earning spouse. However, if one spouse is disabled or a full-time student, a nonworking spouse is deemed to have earned income of $250 per month for one qualifying dependent or $500 per month for 2 or more dependents. The deemed income for a spouse who is a student applies only during the months the student is full time.
The credit amount = a percentage of unreimbursed employment-related qualifying expenses of up to $3,000 for 1 qualifying dependent or $6,000 for 2 or more dependents.
The credit percentage ranges from 35% for incomes of $15,000 or less, down to 20% for incomes exceeding $43,000. For every $2000 above $15,000, the credit percentage decreases by 1%.
AGI | Credit % | 1 dependent | 2 or more |
---|---|---|---|
$15,000 or less | 35% | $1,050 | $2,100 |
$15,001 | 34% | $1,020 | $2,040 |
$17,001 | 33% | $990 | $1,980 |
$19,001 | 32% | $960 | $1,920 |
$21,001 | 31% | $930 | $1,860 |
$23,001 | 30% | $900 | $1,800 |
$25,001 | 29% | $870 | $1,740 |
$27,001 | 28% | $840 | $1,680 |
$29,001 | 27% | $810 | $1,620 |
$31,001 | 26% | $780 | $1,560 |
$33,001 | 25% | $750 | $1,500 |
$35,001 | 24% | $720 | $1,440 |
$37,001 | 23% | $690 | $1,380 |
$39,001 | 22% | $660 | $1,320 |
$41,001 | 21% | $630 | $1,260 |
$43,001 or more | 20% | $600 | $1,200 |
The credit is determined as follows:
-
Credit Base = Lesser of Actual Qualified Expenses and ($3,000 for 1 Dependent or $6,000 for 2 or more − Tax-Free Employer Reimbursements)
-
Dependent Care Credit = Credit Base × Applicable Credit Percentage
Tax-free reimbursements from a qualified employer dependent-care program are subtracted from the $3,000 or $6,000 maximum expense before determining the credit base. The credit is claimed on Form 2441, Child and Dependent Care Expenses and attached to Form 1040 or 1040A. The name, address, and taxpayer identification number, which is usually the social security number, of the child care provider must be reported on Form 2441. The taxpayer should obtain this information by having the child care provider fill out Form W-10, Dependent Care Provider's Identification and Certification; the form should be kept by the taxpayer for her records — it should not be sent with the taxpayer's tax return.
Examples
Case 1: You make $50,000, and have 2 children, and paid $8,000 for child care. Since your adjusted gross income exceeds $43,000, your applicable credit percentage is 20%, so the maximum dependent care credit = 20% × $6,000 = $1,200.
Case 2: Same as Case #1, except that your qualifying expenses are only $4,000. Therefore, the credit percentage must be applied to the lesser of $4,000 and $6,000: $4,000 × .2 = $800
Case 3: Same as Case #1 except that you received $5,000 of tax-free reimbursements from your employer. Therefore:
- Credit Base = $6,000 − $5,000 = $1,000
- Dependent Care Credit = $1,000 × .2 = $200
If the entire portion of expenses is not for the dependent's care, then expenses must be allocated between the dependent's care and the other portion, unless the other services are minimal. Furthermore, if the taxpayer spent only a portion of the tax year either working or looking for work, then the maximum credit must be prorated so that the percentage of the maximum credit = the percentage of time the taxpayer either worked or looked for work during the year. So if a taxpayer worked or looked for work for only 6 months during the tax year, then the maximum credit base will be $1,500 for one dependent and $3,000 for 2 or more dependents.
Employers May Provide Tax-Free Dependent Care Assistance
Daycare services can also be provided by an employer under a nondiscriminatory plan as a tax-free fringe benefit up to the lesser of the earnings of the lower income spouse or $5000 ($2500 for a married employee filing separately). No more than 25% of this benefit can be paid to owner-employees, their spouses, or dependents. For 2021 only, the maximum employer-provided dependent care benefit exclusion is increased from $5,000 to $10,500.
- If a spouse is a full-time student or is disabled, then, for calculating the limit of this tax-free dependent care assistance, that spouse is presumed to earn $250 per month for 1 dependent, or $500 per month for 2 or more dependents. The limit for the tax-free exclusion is figured on Form 2441, Child and Dependent Care Expenses.
- Expenses for dependent care are also excludable from income if they would also qualify for the dependent care credit.
- Any reimbursement of expenses by the employer is also excludable from income, but only if the care provider is not a dependent of either spouse or by their child younger than 19. The employer must be given the care provider's name, address, and tax identification number, and that identifying information must also be listed on the taxpayer's return when claiming the exclusion.
Employers may also offer a dependent care flexible spending arrangement, allowing the employee to contribute pretax earnings of up to the lesser of $5000 or the earnings of the lower income spouse. The employer may also allow a 2½-month grace period for unused dependent care FSA contributions.
The rules for the dependent care FSA are like the rules governing the dependent care fringe benefit:
- FSA distributions reduce the expenses eligible for the dependent care credit
- Both spouses must be working, unless a spouse is disabled or a full-time student
- Highly compensated employees may have a lower contribution ceiling, as required by nondiscrimination rules.
The reimbursement amount that is tax-free is calculated in Part III of Form 2441. The employer may limit reimbursements to the account balance, so if $1500 is paid to a daycare center, but there is only $500 in the account and the employee is contributing $500 per month, then the employer may pay 3 installments of $500 as money is added to the account.
Historical Notes
The Tax Cuts and Jobs Act has provides a $500 credit for dependents other than children. The child tax credit has also been has been greatly increased by recent legislation.
2021
For 2021 only, the American Rescue Plan Act (ARPA), signed into law in March 2021, increases the size of the credit for child or dependent care expenses, making it fully refundable, and increases tax-free employer-provided benefits.
- The unreimbursed employment related qualifying expenses on which the credit is based increases from $3,000 for 1 qualifying dependent or $6,000 for 2 or more dependents to $8,000 and $16,000, respectively.
- The maximum credit rate increases from 35% to 50%, increasing the maximum credit to $8,000.
- The maximum 50% rate applies to incomes up to $125,000, phasing down to 20% for incomes up to $185,000, then remains at 20% for incomes up to $400,000, then phasing down to 0% for incomes up to $440,000.
- The maximum employer-provided dependent care benefit exclusion is increased from $5,000 to $10,500.
Making this credit fully refundable means that lower income taxpayers can enjoy the full benefit of this credit. If they have a low tax liability, they will receive unused credit as a refund. However, these benefit changes only apply to tax year 2021, after which these provisions will revert to previous law.