There are many tax credits and deductions available to parents and families, but one of the most overlooked and beneficial is taking a tax credit toward the money spent on daycare. These expenses qualify for the child care tax credit (IRS Form 2441) — formally known as the Child and Dependent Care Tax Credit — and if your family has never taken advantage of this tax break, it can be a game-changer the next time you file your taxes.
Millions of families use daycare and childcare services, and they can be quite expensive. While claiming daycare expenses toward a tax credit won’t pay for all the costs associated with child care, it can help reduce them significantly. This article will break down what the daycare tax credit is, how to qualify, and how it can lower your final tax bill. And, finally, you’ll get some tips on other deductions and credits that can help everyday American families like yours.
Is daycare tax deductible?
Taking a tax break on daycare expenses is considered a tax credit (not a tax deduction). It is important to note the difference between the two. According to the IRS website:
- A tax deduction will reduce your taxable income and is calculated based on a percentage of your tax bracket. For example, if you are in the 20% tax bracket, a $1,000 deduction will save you $200.
- A tax credit, on the other hand, reduces your total tax bill dollar for dollar. So, a $1,000 tax credit will shave $1,000 off your tax bill, regardless of your tax bracket.
How much of a tax credit can I get for my daycare expenses?
When calculating the tax credit you receive on your daycare expenses, the total amount you use can be no more than $3,000 for one qualifying dependent or $6,000 for two or more qualifying dependents. If you receive other dependent care benefits — such as a Dependent Care Account — the same costs cannot be applied to both benefits.
According to IRS Form 2441 (the form used for the child care tax credit), the credit itself depends on your income level, but most families should see a 20% credit. But even if your daycare expenses don’t maximize the child care tax credit, even the smallest amount can help.
Is my child a qualifying dependent?
In most cases, as long as your child is under 13, they qualify as your dependent. It gets more complicated for qualifying dependent children who have divorced or separated parents or parents living apart.
The custodial parent can usually claim a tax credit for daycare expenses, even if they can’t or won’t claim the child as an exemption on their own return. The custodial parent is considered the parent with whom the child or children spend the most nights during a tax year. If they spend an equal number of nights with each parent, the custodial parent is considered the parent with the higher adjusted gross income. Be sure to check the IRS guidelines before filing for details on who can claim the credit in cases of divorce, separation or separating parents.
Who can claim the daycare tax credit?
To qualify for a tax credit on your daycare expenses, you must meet certain criteria set by the IRS, which include:
- You must have earned income from work, such as a wage or salary from a job. If you are married and file jointly with your spouse, your spouse must also have income. Self-employment numbers, and full-time students and people with disabilities are exempt from this requirement.
- You must have the filing status of Single, Married Filing Jointly, Head of Household or Qualifying Surviving Spouse with Qualifying Dependents. Married Filing Separate filing status does not qualify for the credit.
- You must have paid for care so that you and your spouse can work, look for work, go to school, or if you are disabled.
Some parents may not realize they are getting the credit due to the nature of their work. Mary Beth Foster is a freelance writer in North Carolina. At first, she and her husband weren’t sure if they qualified because of her self-employment status.
“Because of the freelance nature of my work, he’s not sure (if) sometimes writing at Starbucks counts,” he said.
But a little research on their part assured them that they met the requirements.
“We thought we ended up saving a few hundred dollars that I owed in taxes for my freelance writing because they weren’t taken out of my checks,” Foster said.
The IRS considers most types of paid child care eligible for the credit, including:
- Qualifying expenses for daycare, babysitters, nannies and domestic workers (such as a housekeeper or cook) who provide childcare as part of their duties.
- Expenses paid for day camps and summer camps, even if the camp is centered around an activity or sport, as long as the camps provide care while you and/or your spouse work or look for work.
- Preschool expenses, according to TurboTax, as well as expenses related to nursery school and other pre-kindergarten programs that may be considered daycare.
- Before and after school care costs.
- Expenses related to a nurse or other care provider for a qualified disabled dependent.
Expenses related to kindergarten and education beyond it do not count for the credit. Overnight camps are also not considered eligible expenses.
What forms do I need if I qualify for the tax credit?
If your daycare expenses qualify for a tax credit, you’ll need to know how to claim it on your tax return. It may seem daunting to add another form to your long haul, but this one is well worth it.
You will need to complete IRS Form 2441 and submit it with your return. E-file tax sites — like E-file and TurboTax — make the process easy. If you are using a tax professional to file your taxes, be sure to tell them your intention to file and provide them with all the necessary information required on the form.
Some child care providers will send you the necessary information at the beginning of the year. In others, you will need to ask for the information yourself. You will need receipts or invoices showing your child care expenses, as well as the name, address and Taxpayer Identification Number (TIN) from the provider.
Once you have all the information, it’s as easy as giving it to your accountant or tax preparation professional or plugging the numbers into your e-return.
What if I don’t qualify for the tax credit?
If your daycare expenses don’t qualify for the child care tax credit, don’t worry. There are many other child-related deductions or credits that can help you save a little money or get a little back from Uncle Sam.
- The Child Tax Credit provides up to $2,000 per child under 16 years of age.
- The number of children you have can determine your eligibility for Earned Income Tax Credit, which can be a huge savings. For example, in 2023, if you have three or more children and earn less than $56,838 as a single person or $63,398 as a couple, you qualify for this credit.
- There are some credits for education-related expenses, such as American Opportunity Tax Credit and the Lifetime Learning Credit. Remember, at the federal level, only college-related expenses qualify for tax credits. But the value of these tax credits ranges from $2,000 to $2,500.
- The Adoption Credit helps parents who adopt a child during the tax year. Any child under the age of 18 or children with special needs who are unable to care for themselves are eligible. In 2023, the maximum adoption credit is $15,950 per qualifying child.
In addition to these tax credits, investing in your child’s education through a 529 plan is another way to save on taxes. Although these investments are not a deduction or credit, interest earned in an authorized 529 plan is not subject to federal income taxes. Additionally, you do not have to pay federal income taxes on the money if it is withdrawn and used for qualified higher education expenses.
