What You Need to Know about the Child Care Tax Credit

tax-1Tax season is here. This is the time of year where most Americans can fall into one of two categories. You are either a person who files early or a person who waits until the last possible moment to file your taxes. No matter what kind of filer you are, it is always important to look over your information carefully to ensure you receive the maximum refund possible.  

If you pay for child care expenses, you may qualify for the Child and Dependent Care Credit to help you with those costs.

What is the child care tax credit?

An important thing to remember about the Child and Dependent Care Credit is that it is a credit and not a tax deduction. A tax deduction reduces the amount of taxable income. A $1,000 tax deduction may reduce your tax bill by only $150 or so. A tax credit reduces your tax bill dollar for dollar. In this case, a $1,000 tax credit cuts $1,000 from your tax bill and results in a larger refund.

The purpose of the credit versus a deduction is so parents can use this money to help pay for child care expenses. While tax deductions are nice, a sizeable credit goes a long way in offsetting care expenses.

Who qualifies for the Child Care and Dependent Care Credit?

The Child and Dependent Care Credit is not restricted to families of certain income levels. Any parent who spends money on child care expenses may qualify for a credit. According to the IRS, other requirements include:

      • Your qualifying dependent is under 13-years-old.
      • You had to pay for care in order for you (and your spouse if filing jointly) to work, seek employment, attend school or if you were disabled.
      • Individuals must have earned income from employment or self-employment during the year to qualify.
        • Individuals are exempt from the earned-income requirement if they attended school full-time or are disabled.
        • Income from investment profits is classified as non-earned income and does not count.
      • The care provider must not be the spouse or parent of your qualifying child.
      • Individuals must be able to identify all persons or organizations that provide care for the qualifying child.

Qualifications vary if the child’s parents are divorced, separated or living apart. Publication 503, Child and Dependent Care Expenses from the IRS breaks down exactly who and what qualifies for the credit.

How much is the credit worth?

The credit is worth 20-35% of what you paid on child care expenses. Expenses paid to daycare centers, babysitters, summer camps or other providers may be qualifying expenses. One individual can list a maximum of $3,000 for child care expenses. Two individuals may list up to $6,000 in expenses. The maximum credit is $2,100, or 35% of $6,000 in child care expenses.

While families at any income level may qualify for the credit, the amount of your household income effects the total amount of the tax credit. If your income is below $15,000, you will likely qualify for the full 35%. Individuals with an income of $43,000 or more will likely receive credit for 20% of expenses.  

How do I file for the credit?

In order to receive the credit, you need to prove the amount spent on child care expenses. The name and address of child care providers must be listed on your return. If your child care provider is not tax-exempt, the Taxpayer Identification Number must be included, as well. Individuals can use Form W-10 to request this information from child care providers. If you are unable to provide this information, don’t worry. You may still qualify for the tax credit if you show due diligence in attempting to gather the necessary information.

If you qualify for the credit, you will need to complete the Child and Dependent Care Expenses form, Form 2441. Visit the IRS Topic 602 webpage for a complete list of forms needed to file for the credit.

To help make filing your taxes easier, remember to always save child care receipts. If you did not save your receipts, contact your providers for copies as soon as possible. This will give you accurate expense totals for the year and give proof you paid a qualified provider for care.

Remember, every family situation is different. This is meant to be a general guide. It is always a best practice to consult with a tax professional to ensure that you file accurately and receive the largest credit possible.


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