Child and Dependent Care Expense Tax Credit

If you send your children or other dependent to daycare so you can work or look for work, there is a federal tax credit than can help save you money. This credit can be applicable to your situation if you pay a daycare center, a babysitter, or other place to watch your dependent(s). With very high costs of childcare, this tax credit can help you get back some of your money when you file.

The Child and Dependent Care Credit (CDCC) generally applies if a taxpayer pays someone to take care of:

• One or more dependents who are under age 13
• One or more dependent(s) who are not able to care of themselves
• A spouse or qualifying relative who is unable to take care of their self.

Furthermore, if a taxpayer who received dependent care benefits from an employer during the tax year, these payments might be excluded—in full or part—from their annual taxable income. Here is an overview of all child-related tax credit and tax deductions.

Note that the Child Tax Credit and the Child and Dependent Care Tax Credit (CDCC) are two different benefits you might be eligible for. The CDCC helps cover up to 35% of your work-related childcare costs, but it is nonrefundable.

To qualify, you need to pay for childcare so that you (and your spouse, if you're filing jointly) can work or look for work. You can report expenses up to $3,000 for ONE child or $6,000 for TWO or more children and 35% of this total could be the amount of your credit. This means that you could get a credit of $1,050 for one dependent or $2,100 for two or more dependents.

Keep in mind that the percentage of costs you can claim decreases as your income increases. If your income exceeds $43,000, the maximum credit drops to 20% of your childcare expenses.

Dependent and Child Care Credit Qualifications

You will generally qualify for the Child and Dependent Care Tax Credit if you meet all of the following conditions:

A: Qualifying Person Test

You have a qualifying dependent under the age of 13 as of December 31. If you have a child of divorced or separated parents or parents living apart, this child can still be treated as a qualifying person or dependent; see the conditions under D.

In general, a qualifying person is one who you take care of, both physically and financially, and one which meets either the age or disability requirements. You should qualify for this credit if you make dependent care payments for a young child or a disabled person of any age so that you can work or look for work.

There are exceptions for a qualifying person who was born or died during the year and for a child of divorced or separated parents.

B: Earned Income Test

A taxpayer or taxpayers (if filing married filing jointly) must have earned income (i.e. wages, salaries, taxable employee payments, disability pay reported as wages, strike benefits, net earnings from self-employment, nontaxable combat pay) during the tax year. There are special rules for a full-time student-spouse or a spouse who is unable to take care of himself or herself due to physical or mental disabilities; in this case, the spouse must live with the taxpayer. See more details on earned income in IRS Publication 503.

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C: Work-Related Expense Test

A taxpayer must pay child and dependent care expense so that the taxpayer (and spouse if filing married joint — MFJ) can either work or seek employment. A taxpayer or spouse can work for an employer or in an owned business as a full-time or part-time employee, either from an office or from home. For example, if a taxpayer works during the day, their spouse works at night, and there are care payments made for the 5-year-old child during the taxpayers working hours while the spouse is sleeping, these are considered qualifying work-related expenses.

• These care expense payments must be made to somebody the taxpayer (and spouse if filing MFJ) cannot claim as a dependent on the tax return. If these payments are made to a child, stepchild, or foster child, this child CAN NOT be a dependent on the taxpayer's tax return and must be age 19 or older by December 31.
• Child and dependent care expense payments cannot be made to the taxpayer's spouse or the parent of the qualifying person if the qualifying person is the taxpayer's child and under the age of 13.
• Your filing status is single, married filing jointly, head of household, or qualifying surviving spouse with a dependent child.
• You (and your spouse if married filing jointly) earned income from employment or self-employment. You are exempt from this requirement if you were a full-time student or disabled.
• You paid someone to provide care for a qualifying person and the care provider was not someone you could claim as a dependent, the parent of your qualifying person, your spouse, or your child under the age of 19 (regardless of whether they are a dependent).
• You had to pay for child or dependent care so that you (and your spouse if married filing jointly) could work, seek employment, attend school, or if you were disabled.
• Note: The cost of sending kids to day camp in the summer counts toward the Child and Dependent Care Credit; overnight camps don't count.

D: Joint Return Test

• The single or head of household can qualify for the Child and Dependent Care Tax Credit.
• Couples who file a tax return as married filing jointly—MFJ—may qualify for the tax credit. If a taxpayer is legally separated or living apart from a spouse, you may be able to file a tax return as married filing separate and still qualify for the credit. A taxpayer is considered married and is eligible to take the credit if all the following apply:
  • You file a return apart from your spouse.
  • Your home is the home of a qualifying person for more than half the year.
  • You pay more than half the cost of keeping up your home for the year.
  • Your spouse does not live in your home for the last 6 months of the tax year.

Read IRS Publication 501 for more details on who a custodial parent is.

E: Care Provider Identification Test

The provider of the care must be a qualifying person or business.

• On your return, you will need to provide the identity (SSN or EIN) of the care provider and enter an address. You can use Form W-10 to request this information from the care provider
• If the care provider is a household employee, obtain Form W-4 from the provider/employee
• If you are residing in a foreign country and your care provider does not have an SSN or EIN (or U.S. taxpayer identification number) enter “LAFCP” (Living Abroad Foreign Care Provider) in the space for the care provider's taxpayer identification number.

You will be able to claim the credit when entering valid credentials for the person or place. If you cannot obtain the information but show due diligence, you can generally still claim it - see F below.

F: If You Are Missing Care Provider Identification

If you meet the other requirements to claim the Child and Dependent Care Credit, but are missing the social security number or other taxpayer identifying number of a provider, you can still claim the credit by demonstrating "due diligence" in attempting to secure this information.

• If a provider of childcare refuses to give you the identifying information, you can still claim the credit. You must provide whatever information is available about the provider (such as name and address) on Form 2441, Child and Dependent Care Expenses. You should write "See Attached Statement" in the columns requesting the missing information - eFile helps you complete these details.
• The attached statement should explain that you requested the provider’s identifying number, but the provider did not give it to you. This statement will support a claim of the use of due diligence in trying to secure the identifying information.

What Are Dependent Care Benefits?

Care benefits may be paid to you and are reported on your W-2.

• Dependent care benefits are employer-sponsored payments for care providers (fair market value) either directly paid to the provider or to you
• Care benefits could also be pre-tax contributions paid by you (the taxpayer) under a dependent care flexible spending program.
• Your salary may have been reduced for the payment of care provider expenses by the employer (Box 10 of the W-2 should show dependent care benefits). Benefits as a partner should show on box 13 of Schedule-K1 form 1065. These amounts need to be listed under Code "O" on Form 2441, Part III. The eFile Tax App will guide you through this when you prepare your tax return.
• Note: Your employer will be able to tell you if employer provided dependent care benefits under a qualified plan can be excluded from your income.
• For additional limits or restriction on what dependent care benefits are and how to report them, read this publication on Child and Dependent Care Expenses.

Earned Income Limit

The annual expenses used to calculate the dependent care credit can not be more than:

• A: the earned income for the year (for singles)
• B: the smallest amount of the earned income - of one spouse - for the year (for married couples and if both spouses worked). For example, if one spouse had $18,000 in earned income and the other spouse had $2,000 in earned income, and the expenses were $3,000, then the amount to calculate the dependent credit cannot be over $2,000 (as this is the smaller amount of earned income between both spouses).

Child and Dependent Care Credit Amounts

The tax credit for child and dependent care expenses is nonrefundable. On qualifying daycare expenses, a taxpayer can claim up to $3,000 for ONE qualifying person or child, and $6,000 for TWO or more qualifying persons or children. See also the qualifying person test under Section A above.

For example, if you paid $400/month for after-school care for your child who turned 13 on June 1, you can use the $2,000 of care expenses from January to May to calculate the credit because it is not over $3,000. However, as of June 1, the 13-year-old child would no longer be a qualifying person.

The maximum credit is 35% of your dependent care expenses. Generally, the more income you earn, the lower the percentage of employment-related expenses that are considered in determining the credit (see the detailed tiers below). Once your adjusted gross income is over $43,000, the maximum credit is 20% of your expenses. The eFile tax app will create the calculations for you and generate form 2441. See more detailed information about the Child and Dependent Care Credit.

If a spouse is a full-time student or is unable to care for themselves, you are treated as having earned income for each month in the amount of $250 for one qualifying person, or $500 for two or more qualifying persons at any time during the year. For more information on these and other exceptions, read this detailed information about the Child and Dependent Care Credit.

Care Expenses Paid Last year

You will need to complete Worksheet A for Form 2441 if you had qualified dependent care expenses last year but the maximum amount of dependent care benefits were not paid until this year. You can also do this if a credit for the maximum for this year was not claimed, and you paid last year's care expenses. This worksheet will also show the adjusted gross income phase out amounts and will show the amount you might qualify for on your next tax return. In order to complete this step easier, start the eFile tax app and these calculations will be done for you.

How to Claim the Dependent, Child Care Tax Credit

eFile.com makes it easy for you to claim the CDCC on your tax return. Once you enter your childcare expenses for your dependent, we will prepare the appropriate form for you and your completed return will then include the 2441, Child and Dependent Care Expenses—eFileIT.

When you provide the information for the credit, you must include the Social Security Number (SSN) of each qualifying person in order to claim the credit. Additionally, you must provide the name, address, and taxpayer identification number of your child or dependent care provider.

If you cannot obtain or are missing the social security number or other taxpayer identifying number of a child care provider, you can still claim the credit by demonstrating "due diligence" in attempting to get this information. Or, if a provider of childcare refuses to give you the identifying information, you can still claim the credit. If you need special instructions for this when preparing your return on eFile.com, contact us and we can assist you.

Did Somebody Claim Your Dependent?

A qualifying person for the Child and Dependent Care Credit may only be claimed on one tax return. If a dependent is claimed on more than one tax return (for example, a child is claimed by both divorced parents), then the IRS will apply a set of tiebreaker rules to see who gets to claim the dependent.

See what other tax credits and tax deductions may be available to you.

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