Credit for child and dependent care expenses explained

Key takeaways

• The Child and Dependent Care Tax Credit, commonly called the Daycare Credit, is designed to reduce expenses related to childcare and dependent care for families.
• The Daycare Credit offers many benefits, which include offsetting the costs of childcare, making it possible for parents and guardians to work, and more.
• In 2024, the Daycare Credit applies to 20% to 35% of up to $3,000 for care-related expenses for one qualifying dependent, and up to $6,000 for two or more.
• To claim the Daycare Credit, your qualifying dependents can include children under 13 and a spouse or other dependent who cannot care for themselves or are a danger to themselves if you leave them alone while you, and your spouse, work.
• Eligible expenses you can claim for the Daycare Credit include preschool, after-school programs, day camps, and many other child and dependent care expenses. Expenses also include home health care aides or care providers for other types of dependents.
• A Dependent Care Benefits flexible spending account (DCB FSA) is a pre-tax account that you can use to pay for eligible dependent care services. If you're using funds from a DCB account to cover childcare or dependent care, you cannot claim the credit for those same expenses.
• The Daycare Credit and the Child Tax Credit (CTC) are two vital tax benefits offered by the IRS, but they serve different purposes and have distinct eligibility criteria and benefits. You can claim both if you meet the criteria for each.

What is the Child and Dependent Care Tax Credit?

The Child and Dependent Care Tax Credit is a tax benefit provided by the federal government, and many states, to help reduce the financial burden of childcare and dependent care for families. This tax credit is crucial if you’re a parent or guardian because it directly reduces the amount of tax you owe for the year, providing more disposable income for other necessities.

This credit can help cover a wide variety of care services, including daycare, in-home care, and after-school programs. Keep in mind that expenses must be work-related and necessary for you to be able to earn an income.

Benefits of the Child and Dependent Care Tax Credit, or the Daycare Credit

The Daycare Credit offers many benefits that help to reduce the financial strain on families who need care services.

• One of the most immediate benefits of the Daycare Credit is that it reduces the amount you owe in income taxes, which increases your available income for other expenses.
• By offsetting part of the care costs, the credit supports you in seeking or maintaining employment.
• Access to childcare allows you to pursue further education or training opportunities, attend work-related events, or simply increase your work hours.
• With the financial support provided by the credit, higher-quality care options are more affordable and accessible for many families.
• Financial assistance with care expenses may help relieve some stress of balancing work and family responsibilities.

How much is the Daycare Credit in 2024?

In 2024, the Daycare Credit allows between 20% to 35% (depending on your MAGI, or modified adjusted gross income) of up to $3,000 for care-related expenses for one qualifying dependent, and up to $6,000 for two or more.

The maximum of the Daycare Credit is $1,050 for one dependent and $2,100 for two or more.

How is the Daycare Credit calculated?

The credit is calculated based on your MAGI. Here’s a breakdown of the percentage you can claim of your childcare or dependent care expenses based on your MAGI.

Who is a qualifying dependent?

The IRS sets specific guidelines that define who can be considered a qualifying dependent for the Daycare Credit, primarily focusing on the dependent's age, their ability to care for themselves, and their relationship to you.

Here's what you need to know

• Dependent children under the age of 13 qualify. You must be the custodial parent.
• If your child turns 13 during the tax year, you can only claim the credit for childcare expenses you cover before their 13th birthday.
• If your spouse is physically or mentally incapable of caring for themselves and has lived with you for more than half the year, their expenses are also eligible for this credit.
• Any dependent that you claim on your taxes qualifies if they are physically or mentally unable to care for themselves and have lived with you for more than half the year. This could include parents, siblings, or other relatives.
• Expenses for the care of a newborn or newly adopted child can be included for the tax year they are born or adopted, even if they haven't lived with you for more than half the year.

For comprehensive guidelines, please refer to IRS Publication 503. This provides detailed explanations and examples to help you determine your specific eligibility based on your family's circumstances.

Eligibility criteria for the Child and Dependent Care Tax Credit

To claim the credit, it's important to understand which expenses are eligible under IRS rules.

Eligible expenses

• Costs associated with nursery school, preschool, or similar pre-kindergarten programs are eligible. These early education costs are considered care expenses rather than educational expenses.
• Expenses for programs that care for your child before or after school hours qualify for the credit, as they are considered care services necessary for the parents to work.
• Payments to care providers who look after your dependent outside your home, such as neighbors or professional caregivers, are eligible.
• Costs associated with transporting your child or dependent, like bus fares or taxi charges, can be included if the transportation is part of the care service.
• Expenses related to placing your dependent in a licensed care center are eligible if the center complies with all applicable regulations.
• Fees for day camps may qualify, even if they specialize in a particular activity, like soccer or computers, if the primary purpose is to care for the child during work hours and there are no overnight stays.
• Certain fees, such as application fees, deposits, and other incidental expenses that are directly related to securing childcare services, are eligible.

Ineligible expenses

• Child support payments are not considered care expenses and thus are not eligible.
• Costs related to kindergarten or higher levels of schooling do not qualify because they are considered educational rather than care expenses.
• Summer school and tutoring are educational expenses and do not qualify as care expenses.
• Sleepaway camps are not eligible as they are not considered necessary for the parent to work.
• Personal expenses for things like food, lodging, clothing, and entertainment are not eligible unless they are minor, incidental amounts that are part of a care service program.

Keep in mind that if your employer contributes to your child or dependent care expenses, whether through direct payment or through benefits, like a DCB FSA, you must subtract the amount of that contribution from your total qualifying expenses. If you use an employer-sponsored care facility, it may also require you to make similar adjustments.

Dependent Care Benefits FSA vs. tax credit

When planning how to manage child and dependent care expenses, it's essential to understand the differences between a DCB FSA and the Daycare Credit. Both options offer tax advantages, but they operate differently and have unique rules and benefits.

What is a Dependent Care Benefits FSA?

A DCB FSA is a pre-tax account that you can use to pay for dependent care services. These may include summer day camp, childcare or adult daycare, preschool, and before- and after-school programs.

You contribute to your DCB FSA from your paycheck before taxes are taken out, which reduces your taxable income. When you claim the Daycare Credit, on the other hand, it reduces the amount of income taxes you owe, dollar for dollar.

Remember, you cannot claim the Daycare Credit for any expenses paid for using your DCB FSA. However, you can claim the credit for any child or dependent care costs that you pay for above the DCB payments.

Differences between the Child and Dependent Care Tax Credit and the Child Tax Credit

The Daycare Credit and the Child Tax Credit (CTC) are two vital tax benefits offered by the IRS. Each has different purposes and distinct eligibility criteria and benefits.

Purpose

• The Daycare Credit is designed to help offset the cost of care for qualifying dependents, allowing parents and guardians to work, look for work, or further their education. It covers expenses such as daycare, after-school programs, and summer camps.
• The CTC, in contrast, provides financial relief to families simply for having dependent children, regardless of whether they need childcare services or not. This credit aims to lighten the financial load for families raising children.

Eligibility requirements

• To claim the Daycare Credit your child must be under 13 for at least part of the tax year, or you must have a disabled spouse or dependent of any age who cannot care for themselves.
• To claim the CTC, your child must be under the age of 17 at the end of the tax year.
• With the Daycare Credit, the percentage of your eligible expenses you can claim depends on your income. There is no income threshold for this tax credit, anyone with earned income and daycare expenses who meets all the requirements can claim the credit.
• With the CTC, the full benefit is available up to a certain income threshold, after which it begins to phase out. Higher-income families might receive a reduced credit or none at all.

Refundability

• The Daycare Credit is a nonrefundable tax credit, which means that if the credit is greater than the income tax you owe, whatever is left over can’t be used on the tax return.
• The CTC for 2024 includes both refundable and nonrefundable parts. Up to $1,700 per child can be refunded if your credit exceeds the taxes you owe, and $300 per child is nonrefundable and only lowers your tax bill without leading to a refund.

 Maximum credit amount

• The Daycare Credit can be up to 35% of qualifying expenses, up to $3,000 for one qualifying individual and $6,000 for two or more.
• The CTC can be up to $2,000 per dependent child.

Eligible expenses

• You can only claim the Daycare Credit for expenses related to caring for a dependent while you work or look for work.
• With the CTC, you don’t have to document specific expenses. It’s awarded based on the number of qualifying children or dependents you have.

Can you claim both the Child Tax Credit and the Daycare Credit?

Yes, you can claim both the CTC and the Daycare Credit on your tax return. Each credit has its own set of eligibility requirements. You need to meet these independently to benefit from each credit.

For many families, combining these credits can optimize tax saving, by reducing income taxes they owe and ensuring their care expenses are covered.

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