Can You Claim the Child and Dependent Care Tax Credit?

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

Teacher and toddlers in daycare
••• Jupiterimages/Stockbyte/Getty Images

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. 

If you are in this situation, the Internal Revenue Service provides some relief. If you pay for daycare expenses for your children or a disabled dependent of any age, as of 2018, you may 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.

The child care or adult dependent care must be intended to allow you to work, look for work, or attend school full time. If you are married, your spouse must also be working, looking for work, or attending school 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. 

Your Qualifying Child or Dependent

Your child must be your dependent. He 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. 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 lived with you at least half the year, you may still be able to 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 may 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. 

Day camps may be qualifying providers, but overnight camps do not qualify. "The cost of sending your child to an overnight camp is not considered a work-related expense," according to the IRS. "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. That's not the amount of your credit. It's the amount of daycare expenses to which you can apply the percentage. If you spent $7,000 over the course of the year on care for your two children so that you can work, the credit only applies to the first $6,000. 

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. 

The percentage of your credit ranges from 20 to 35 percent of what you spent on daycare, depending on your adjusted gross income. Although there is no limit on how much you can earn and still qualify, the percentage does decrease as your earnings increase. A full chart of the percentage rates appears in IRS Publication 503.