Child and Dependent Care Credit: Income Limits, Expenses, and Qualifying People
Key takeaways:
The child and dependent care credit helps you pay for the care of qualifying dependents, such as children under 13 or other dependents unable to care for themselves, so that you can look for or go to work.
If you qualify, you can receive a nonrefundable credit worth 20% to 35% of qualified care expenses. When your adjusted gross income exceeds $43,000, your maximum credit drops to 20%.
Qualified expenses for the child and dependent care credit include summer camps, nursery programs, and caretakers needed to help a dependent while you work or search for employment.
The cost of child care, or taking care of another dependent, can easily add up to over $10,000 per year, depending on their needs and the state where you live.
If you qualify for the child and dependent care credit, you can offset your costs on your tax return. Only certain expenses qualify, such as daycare and babysitting costs incurred to care for a dependent while you work or look for work.
We break down how the child and dependent care credit works and the qualifications you need to meet.
What is the child and dependent care credit?
The child and dependent care credit is a tax benefit available for individuals who pay for the care of qualifying dependents, such as children under 13 or other dependents unable to care for themselves, so that they can look for work or go to work. Unlike a tax deduction, a tax credit provides a dollar-for-dollar reduction in your tax bill.
For example, suppose you are in the 24% tax bracket, and you received a $4,000 deduction. This means you will save $960 in taxes, which is $4,000 multiplied by 24%.
But let’s say you received a $4,000 tax credit, and you owe $3,500 in taxes. The credit offsets your tax liability. You reduce the taxes owed to $0, for a savings of $3,500.
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Some credits, such as the earned income tax credit (EITC), are refundable. This means that the IRS will send you a refund for the amount of the credit that exceeds your tax liability. But this isn’t the case for the child and dependent care credit. It’s a nonrefundable credit, so if your credit is worth more than the total amount of taxes you owe, you won’t receive a refund. In the example above, for example, you would not be refunded $500 — the amount by which your credit exceeds your taxes owed. You can benefit from this credit if you think you’ll owe money when you file your taxes.
How much is the child and dependent care credit?
The child and dependent care credit allows eligible families to receive a nonrefundable credit for 20% to 35% of qualified expenses. The amounts and percentages generally do not change. However, there was an exception made for the 2021 tax year, which provided a temporary expansion of the credit and made it refundable for eligible taxpayers under the American Rescue Plan.
The maximum amount of work-related expenses you can take into account for purposes of the credit is $3,000 for families with one qualifying person and up to $6,000 for families with two or more qualifying persons. That means the maximum credit you can receive if you have two or more dependents is $2,100 — 35% of $6,000.
Number of children | 2022 credit | 2021 credit expansion |
One | Up to 35% of $3,000 | Up to 50% of $8,000 |
Two or more | Up to 35% of $6,000 | Up to 50% of $16,000 |
The amount of your tax credit will be based on your adjusted gross income. When your adjusted gross income exceeds $43,000, your maximum credit will drop to 20% of your employment-related expenses. There are no income restrictions to qualify for the credit.
Who is a qualifying dependent?
If you want to claim someone for the child and dependent care credit, they must meet the requirements of a qualifying dependent. According to the IRS, here are examples of people who would qualify:
Children under age 13: If your child under age 13 lives with you for more than half the year and can be claimed as a dependent, they would be considered a qualifying dependent.
A spouse who requires care: If your spouse lives with you for more than half the year and they are mentally or physically unable to care for themselves, you may qualify for the credit. A spouse may need care if they are unable to clean, dress, or feed themselves or need supervision for their own safety or the safety of others.
Another qualified person who needs care: If a person lives with you for more than half the year and they are mentally or physically unable to care for themselves, you may qualify for the credit.
Someone in the “another qualified person who needs care” category may still qualify for you to claim the child and dependent care credit if they meet the above requirements, are your dependent or would have been your dependent except that:
Their gross income was $4,400 or more.
The person filed a joint return.
You can be claimed as a dependent on someone else’s return.
If you have a child who is 19 or older by the end of the year who is not your dependent, they can provide the care needed for you to qualify for the credit. For example, suppose your 22-year-old daughter who works full-time and lives on her own babysits your 10-year-old child. You can claim the care expenses for the child and dependent care credit.
Which expenses are eligible for the child and dependent care credit?
Your expenses must be work-related to qualify for the child and dependent care credit. That means the expenses were incurred to allow you to work or search for work. Here are common qualified expenses for the credit:
Babysitters
Before- and after-school care
Day camp or summer camp
Daycare from a licensed provider
Employment taxes paid to service providers
Nannies
Nurses or home care providers
Nursery school
Preschool
If you use a dependent care center, it must meet all state and local regulations. It also must provide care for more than six persons. This does not include persons living in the facility.
You will need proof to claim your child and dependent care expenses on your tax return. Make sure you keep accurate records, track your expenses, and keep receipts from child care providers.
What expenses don’t qualify?
Some expenses that are used for child or dependent care still may not be eligible for the credit. Here are some examples:
Child support payments
Expenses for overnight camps
Expenses that your employer or someone else has reimbursed
Food or entertainment expenses
Medical expenses
Transportation costs to and from a child care facility
Tuition for kindergarten or higher grades
Tuition for summer school
Tutoring
How can you claim the child and dependent care credit?
You must fulfill certain requirements to qualify for the child and dependent care credit. After you have confirmed that you qualify, you will need to file IRS Form 2441, Child and Dependent Care Expenses. Attach your completed form to your 1040 tax return.
Here are the requirements to claim the credit:
Your filing status is single, head of household, qualifying widower with dependent child, or married filing joint.
You provided care to one or more qualifying persons so you and your spouse could work or search for work.
You did not provide care for your spouse, the parent of your qualifying child, or a person you can claim as a dependent. The exception is if they are disabled.
You can also claim the credit if your status is married filing separately. Here are the requirements:
You lived apart from your spouse during the past 6 months of the tax year.
Your home was the qualifying person’s home for more than half of the tax year.
You paid more than half of the maintenance of the home.
But the credit is generally not available for a noncustodial parent. This is a parent whom the child may have lived with for the least amount of time during the year. Even if the noncustodial parent gets a Form 8332 release to claim the child as a dependent, they still cannot claim the credit. However, the Form 8332 may grant a noncustodial parent access to the child tax credit.
Can you claim the child tax credit and the child and dependent care credit?
Yes. The IRS allows you to claim both the child tax credit and the child and dependent care credit if you meet the requirements.
Here’s an example of using both the child tax credit and the child and dependent care credit:
Suppose you have a household income of $80,000 and have a son who is 11 years old.
You paid $7,000 for daycare.
You will receive the child tax credit for $2,000.
You are also eligible for $1,400 for the child and dependent care credit. This is the daycare expense of $7,000 multiplied by 20%. This is the percentage of expenses allowed based on your household income.
Your total credits would be $3,400.
If you have a tax bill of $3,000, the credit will wipe this out, and the remaining $400 will be a refund.
The bottom line
The child and dependent care credit provides substantial tax savings for qualified expenses. But the credit doesn’t apply only for children in your care. You can also claim tax benefits for the care of your parents or other qualifying persons. It’s important to review the rules and requirements each year to find out if you qualify.
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References
Economic Policy Institute. (2020). Child care costs in the United States.
Internal Revenue Service. (2018). Form 8332.
Internal Revenue Service. (2022). Instructions for Form 2441 (2022).
Internal Revenue Service. (2023). About Form 2441, child and dependent care expenses.
Internal Revenue Service. (2023). Child tax credit 3.
Internal Revenue Service. (2023). Credits and deductions for individuals.
Internal Revenue Service. (2023). Publication 503 (2022), child and dependent care expenses.
Internal Revenue Service. (2023). Tax credits for individuals: What they mean and how they can help refunds.
Internal Revenue Service. (2023). Topic No. 602, child and dependent care credit.
The White House. (n.d.). American Rescue Plan.
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
