Many families across the United States find childcare expenses can be astronomical in their budget and tax bill. With both parents working and the rising childcare costs, it can be difficult to maintain financial stability.
Fortunately, the federal government has created programs to help offset childcare expenses, such as the Dependent Care Tax Credit. Through the program, families can reduce some costs of raising children while helping ease the strain of balancing family and financial responsibilities.
Key Takeaways
- You can claim The Child and Dependent Care Tax Credit up to $3,000 in expenses for one qualifying dependent or up to $6,000 for two or more qualifying dependents.
- The eligibility criteria for claiming a dependent as a qualifying relative include being under age 13 when a third party or the dependent provided care is permanently disabled.
- In addition to this credit’s benefits, you can apply for Child Tax Credit and Flexible Spending Account to reduce pressure in raising children.
Requirements of the Child and Dependent Care Credit
Before knowing eligibility requirements, you need to understand what this credit is. This credit is a benefit the IRS offers to help offset the costs of caring for children or dependents.
This credit helps parents, guardians, and other caretakers with expenses associated with childcare, elder care, and disabled dependents. You must meet certain qualifications to be eligible for the Child and Dependent Care Credit. These include:
#1: Qualifying Person Test
You must have a qualifying dependent under 13 as of December 31. Additionally, if the relationship between the dependent and parent is non-traditional, such as divorced or separated parents living apart, specific criteria must be met to qualify:
- The dependent must have been under 13 years old or physically/mentally unable to care for themselves at the end of the tax year.
- The parent must have provided over half of the dependent’s financial support throughout the year.
- The custodial parent must have had custody of the child for over half of the year.
For further information on who can be considered a custodial parent, please refer to IRS Publication 501.
#2: Earned Income Test
Taxpayers who are filing joint returns must have earned income to qualify. This includes wages, salaries, taxable employee payments, disability pay reported as wages, strike benefits, net earnings from self-employment, and nontaxable combat pay.
In exceptional cases where one spouse is a full-time student or has physical or mental disabilities preventing them from caring for themselves, the other spouse must live in the same residence for their earned income to count.
For more details about what qualifies as earned income, please consult IRS Publication 503.
#3: Work-Related Expense Test
The Child and Dependent Care Credit is an IRS credit for those taxpayers filing as Single, Married Filing Jointly, Head of Household, or Qualifying Widow(er) with a Dependent Child. The taxpayer and their spouse (if filing jointly) must have earned income from either employment or self-employment.
To qualify for Child and Dependent Care Credit, you must have paid someone to provide care for a qualifying child—someone you cannot claim as a dependent on your tax return. This typically includes children aged 13 and under and certain adults who are disabled or elderly.
Payments made to the parent of one qualifying person, spouse, or child over 19 do not qualify for this credit. Additionally, sending your child to day camp in the summer counts toward the child care tax credit; however, overnight camps do not.
This credit aims to enable taxpayers to offset some of their child care expenses so that they may work or seek employment. This could include any full-time or part-time employer job from an office setting or work from home, as well as owning a business and being self-employed.
You are exempt from this requirement if you were a full-time student or disabled during the tax year.
#4: Joint Return Test
If you file a tax return as Married Filing Jointly (MFJ), you may be eligible for the Child and Dependent Care Credit. If you and your spouse file separate tax returns, you may still be eligible to receive the Adoption Tax Credit as long as the qualifying person resides in your home for more than half of the year and you pay more than half of the costs associated with maintaining your home.
The following conditions
- You must file a return apart from your spouse
- Your home must serve as the primary residence of qualifying persons for at least 6 months of the year
- You should bear more than 50% of expenses in keeping up your home during that period
- Your spouse should not live in your home during the last six months of the tax year.
#5: Care Provider Identification Test
If you are hiring a care provider, a few forms may need to be completed. To ensure accuracy and compliance with the law, you must provide the care provider’s identity in their Social Security Number (SSN) or Employer Identification Number (EIN). You can acquire this information via Form W-10.
For household employees, please provide them with form W-4. If your care provider lives abroad, they cannot obtain an SSN or EIN. In this case, enter “LAFCP” (Living Abroad Foreign Care Provider) instead in the space for the taxpayer identification number.
How Much Can You Receive From Child and Dependent Care Tax Credit?
The amount of taxes you can save using the Child and Dependent Care Credit depends on many factors, including your filing status and income.
For those who file as married filing jointly or head of household with an Adjusted Gross Income (AGI) of less than $15,000, the maximum allowable credit is 35% of up to $3,000 in dependent care expenses for one qualifying person or $6,000 in qualified expenses for two or more dependents for the tax year 2022.
If your AGI is higher than $43,000, then you will only be eligible for a 20 percent credit. For more details, the following table shows the percentage to use based on AGI:
| Adjusted Gross Income Range | Percentage Employment-Related Expenses |
| $0 – $15,000 | 35% |
| $15,001 – $17,000 | 34% |
| $17,001 – $19,000 | 33% |
| $19,001 – $21,000 | 32% |
| $21,001 – $23,000 | 31% |
| $23,001 – $25,000 | 30% |
| $25,001 – $27,000 | 29% |
| $27,001 – $29,000 | 28% |
| $29,001 – $31,000 | 27% |
| $31,001 – $33,000 | 26% |
| $33,001 – $35,000 | 25% |
| $35,001 – $37,000 | 24% |
| $37,001 – $39,000 | 23% |
| $39,001 – $41,000 | 22% |
| $41,001 – $43,000 | 21% |
| $43,001 – No limit | 20% |
Example: If you have one child and earned $29,000 in 2022. You spent $4,000 during the year on child care. You are eligible for a Dependent Care Credit worth up to 28% of what she spent on child care (up to $4,000 X 28% = $1,120).
How to Claim The Credit?
If you are eligible for this credit, you must gather some information. This includes:
- Names and valid taxpayer identification numbers (usually SSNs) of qualifying persons
- Qualified dependent care expenses spent on each eligible person
- Names, addresses, valid taxpayer identification numbers, and amounts paid to care providers during the year
Once you have all this information, you should complete Form 2441 and include it when filing your federal income tax return to claim the credit. Further instructions for filling out Form 2441 can be found on the IRS website.
It is essential to keep records of any work-related expenses and any benefits received for dependent care. Additionally, if a dependent or spouse cannot care for themselves, records should also show details regarding their disability.
Bonus Content: Get Benefits from Child Tax Credit and Flexible Spending Account (FSA)
In addition to the benefits from Child and Dependent Care Credit, you can fully benefit from other tax credits. These financial assistances reduce some of the burden associated with childcare costs and allow parents to focus more on providing their children with an appropriate education.
Child Tax Credit
The credit is worth $2,000 per qualifying child for the tax year 2022. Families who don’t owe taxes can get up to $1,500 for each eligible child back as a refund.
Income requirement must be met to get the full credit in 2023: it’s at most $200,000 for single filers or $400,000 for married couples filing jointly. There may also be other criteria that apply.
Flexible Spending Account (FSA)
An FSA is a great way to save money for qualifying medical and dependent care expenses. It can be funded through salary reductions, allowing the joint funds of you and your spouse or other eligible dependents to pay for certain non-taxable benefits such as childcare or healthcare costs.
Your W-2 form will have a Box 10 that shows the amount of money your employer-provided for dependent care benefits. You can’t use this money and claim the Child Care Credit simultaneously. If your W-2 has dependent care benefits, you must fill out Form 2441 (Form 1040), Part III, even if you don’t plan on claiming the Child Care Credit.
Get Cash Savings from Child and Dependent Care Tax Credit
Child and Dependent Care Credit gives working parents a much-needed break from child care expenses. This money can help reduce the cost of daycare, after-school care, or summer camps for your children. Remember to keep track of qualifying expenses and follow the steps outlined above to get cashback in your pocket!
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