Can You Claim the Child and Dependent Care Tax Credit?

You may be eligible for a tax credit of up to 35 percent

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Paying for child care or adult dependent care is one of the steepest monthly expenses many families face. But without care, they can't leave home to earn a living or go to school. 

The Internal Revenue Service provides some relief if you find yourself in this situation. If you pay for daycare expenses for your younger children or a disabled dependent of any age, you might be eligible for a federal tax credit of up to 35 percent of what you spend, subject to certain limits.

The Basic Rules 

You must have a dependent child or an adult dependent who cannot be left alone because the person cannot provide self-care. You must also have earned income from a job or self-employment.

Care for your child or adult dependent must be intended to allow you to work, look for work, or attend school full time. Your spouse must also be working, looking for work, or attending school if you're married, and thus unable to stay home and provide care. Your spouse must have earned income as well. The exception is if your spouse is disabled and incapable of caring for another person.

You can't claim this credit if you file a separate married return except under some rare circumstances.

Your Qualifying Child or Dependent

Your child must be either younger than age 13 or, if older, must be physically or mentally unable to care for himself because he's disabled. You can claim adult day care expenses for a dependent age 13 or older or for your spouse if that person is physically or mentally unable to care for herself. 

You can't claim child care or adult day care expenses for someone who doesn't live with you at least half the year, and you must pay more than half the costs of maintaining your home. You must generally claim your child as your dependent on your tax return.

Sometimes divorced or separated parents enter into an agreement to allow the noncustodial parent to claim their child as a dependent on their tax return. If you're not claiming your child as a dependent for this reason, but the child nonetheless lived with you at least half the year and you paid for care, you can still claim the child care credit. Only custodial parents can take the credit, however, because of the residency requirement. 

A Qualifying Day Care Provider

The person who provides child care or adult day care services for you cannot be your dependent. For example, you might pay your daughter to take care of her younger brother. You typically cannot include these payments for purposes of calculating the credit unless you do not claim your daughter as a dependent and she is age 19 or older by the end of the year. Nor can you use daycare expenses paid to your spouse or the qualifying child's other parent. 

Summer day camps are qualifying providers, but overnight camps don't qualify. According to the IRS:

"The cost of sending your child to an overnight camp is not considered a work-related expense. The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer."

How Much Is the Child and Dependent Care Worth?

The child and dependent care tax credit is a percentage of your daycare expenses up to $3,000 for one dependent or $6,000 for two or more dependents. But these figures aren't the amount of your credit. Your credit is the applicable percentage of these amounts. If you spent $7,000 over the course of the year on care for your two children so you can work, the credit only applies to a percentage of the first $6,000. 

Calculating the Credit

The percentage of your child and dependent care tax credit ranges from 20% to 35% of what you spent on daycare up to the $3,000 or $6,000 limits. Your applicable percentage depends on your adjusted gross income (AGI). There's no limit on how much you can earn and still qualify, but the percentage does decrease in 1% increments as your earnings increase. A full chart of the percentage rates appears in IRS Publication 503.

Your credit is also limited by your earned income, as well as the income of your spouse if you're married and filing a joint return. If you earned only $5,000 all year, you could only claim $5,000 in daycare expenses even if you spent $7,000. Calculations are based on what you spent or your earned income, whichever is less. If your employer offers dependent care benefits as a perk of your employment, you must subtract this amount from your eligible daycare expenses.