What is the Child and Dependent Care Credit?

The child and dependent care credit is an amount deducted from your total taxes owed to the US Internal Revenue Service (IRS). Qualifying for the credit depends in part on whether your child or dependent is considered a “qualifying” person, how much money you make, and exactly what money you had to pay in order to care for the qualifying person. Many people use the child and dependent care credit to offset payments to daycare facilities, to nannies, housekeepers, or people who provide personal care for a disabled dependent. But it doesn’t represent a dollar for dollar cost of your actual expense. Amounts will differ from year to year because tax codes and tax laws change frequently.

In IRS publications, the child and dependent care credit clearly defines who can take the credit and which people are considered qualifying persons. Any child who lives with you full-time and is under the age of 13 qualifies. Any person, such as a spouse or older child who lives with you full-time and is mentally or physically unable to care for him or herself also qualifies. In order to take the credit, spouses who are married and filing jointly must both work.

A spouse who is a full time student is considered as “working.” If a spouse is permanently and totally disabled, the able spouse may still be able to take the credit for dependent children or for the spouse. Some people are paid for dependent care expenses during the course of the working year. If your employer pays such expenses, you must deduct this money from the child and dependent care credit.

People allowed to take the child and dependent care credit must be filing as one of the following:

Additionally, only parents who have full custody of the qualifying person may take the credit. If you are a non-custodial parent (the child doesn’t live with you), you can’t take the credit.

There is confusion about what expenses are considered “qualifying” under the child and dependent care credit. Generally the following services qualify: housekeeping, babysitting, childcare, maid or chef services, or care at a licensed dependent care facility. Preschool and daycare expenses count but private education, unless at a dependent care facility cannot be deducted under this credit. Furthermore, you can only claim the credit if it is allowing you or your spouse to work or seek work. You can’t deduct babysitting so you can go on a date.

You also can’t deduct the tuition of your kids attending a private school in kindergarten or thereafter, but you may be able to deduct day camp during the summer or spring break. The person/s you hire to provide this care cannot be other dependents. For instance if you pay your 16 year old to watch your 10 year old after school, this expense doesn’t qualify. You may also have to pay taxes or social security for anyone you do hire that works in your home.

Once you’ve determined that you have a qualifying person and allowed expenses to take the child and dependent care credit, you must next look at your total income. Based on your total income, you are allowed to take a percentage of these expenses as a tax credit. This means that when you figure your total tax, you deduct this percentage of expenses directly from your tax. A lower income means you’ll be able to deduct a higher percentage.

The highest allowable expense for work related care is $3000 US Dollars (USD) for a qualifying person. Even if your expenses exceed this amount, the most you can claim is $3000 USD in allowable expenses, and you then only get a percentage of that back based on your total income. If you have two or more qualifying persons, the highest allowable expense increases to $6000 USD.

Again you will only get a percentage of this back, and currently that percentage stands at 35% for lowest income levels. So if you make minimum income and pay at least $3000 USD in qualifying expenses, the maximum amount of the credit for one qualifying child would be $1050 USD. Also, you cannot receive money back from the credit if the amount you can deduct exceeds your tax paid; it can only reduce your tax payments to zero.

To claim this credit, file a 1040 or 1040NR and Form 2441. You can also file a 1040A and complete Schedule 2 to claim the credit. You cannot claim the credit if you file a 1040EZ.