Paying for child care or adult dependent care is one of the steepest monthly expenses many families face. But without care, parents may not be able to leave home to earn a living or go to school.
The Internal Revenue Service’s (IRS) child and dependent care tax credit (CDCTC) provides a tax credit of up to 35% of the expenses you pay someone to take care of your children or adult dependents, making it somewhat easier to afford.
However, various rules and exceptions make the tax credit a bit more complicated than it seems.
- The percentage of your child and dependent care tax credit ranges from 20% to 35% of what you spent on daycare, up to those $3,000 or $6,000 limits.
- In 2021, the American Rescue Plan temporarily increased these benefits due to the COVID-19 pandemic.
- Your applicable percentage depends on your 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.
- In most cases, the credit applies to care for dependent children under 13 and adults who cannot take care of themselves.
How Much Is the Child and Dependent Care Credit Worth?
The child and dependent care tax credit is 20% to 35% of daycare expenses of up to $3,000 for one dependent or $6,000 for two or more dependents. Any children whose care you claim must have been under the age of 13 at the time the care was provided.
The rate used to calculate the credit begins at 35% if your adjusted gross income (AGI) is $15,000 or less, then decreases incrementally by 1% as your income goes up until $43,000, at which point your tax credit is 20%.
In 2021, the American Rescue Plan temporarily increased the benefit from the CDCTC to help working caregivers during the COVID-19 pandemic. The limit on expenses that can be claimed was increased to $8,000 for one dependent and $16,000 for two or more dependents. The maximum credit rate was also raised to 50%. This means a maximum benefit of $4,000 for one individual receiving care and $8,000 for two or more. Families with incomes up to $125,000 are eligible for the full credit, after which the percentage of expenses you can claim gradually decreases until it phases out.
How to Qualify for the Child and Dependent Care Credit
You must have a dependent child or an adult dependent who can’t be left alone while you work, look for work, or go to school full-time because the person can’t take care of themselves. You must also have earned income during the tax year from a job or self-employment.
Your spouse must also be working, looking for work, or attending school if you're married, and must be thus unable to stay home and provide care. Your spouse must have earned income as well, but an exception exists if your spouse is disabled and incapable of caring for another person.
You can't claim this credit if you file married-filing-separately except under certain rare circumstances.
You may be able to get the child and dependent care credit even if your employer provides or subsidizes the cost of care.
Rules for Your Qualifying Dependents
Your child must have been younger than age 13 when the care was provided, or, if they were older than 13, they must have been physically or mentally incapable of self-care. You can claim adult daycare expenses for a dependent age 13 or older or for your spouse if they’re physically or mentally unable to care for themselves.
If you are married but living apart from your spouse, you can claim child care or adult daycare expenses for someone who lives with you at least half the year. To qualify, you must pay more than half the costs of maintaining your home.
Divorced or separated parents sometimes agree to allow the noncustodial parent to claim their child as a dependent on their tax return. If you don’t claim the child as a dependent, and he or she lived with you for more nights during the year than with the noncustodial parent, and you paid for child care, you can claim the credit.
Adult dependents qualify if they lived with you for more than half the year and were not “physically or mentally able to care for himself or herself.”
The IRS defines someone who can’t physically or mentally take care of themselves as “persons who can’t dress, clean or feed themselves because of physical or mental problems” and those who require constant attention because they are at risk of injuring themselves.
Rules for Qualifying Day Care Providers
If you make child-care payments to a dependent who takes care of your children, you cannot claim those expenses. For example, you can’t claim payments you make to your dependent daughter to take care of her brother.
However, the tax code allows you to claim the expenses if you don’t claim your daughter as a dependent, and she’s 19 or older by the end of the year.
No matter your spouse’s age, the IRS won’t allow you to claim a tax credit for money you pay to them to take care of a qualifying child. You also can’t claim payments you make if the person providing care is a relative or dependent, and the child they’re taking care of is yours and under the age of 13.
Summer day camps are qualifying providers if they specialize in one activity (computers or soccer, for example), but overnight camps don't qualify.