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 for day care. These expenses qualify for the child care tax credit (IRS Form 2441) — formally known as the Child and Dependent Care Expenses tax credit — and if your family has never taken advantage of this tax break, it could be a game-changer the next time you file your taxes.
Millions of families use day care and child care services, and they can get pretty pricey. While claiming day care expenses toward a tax credit won’t defray all the costs associated with child care, it can help reduce your tax total. This article will break down what the 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.
How much of a tax credit can I get on my day care costs?
Taking a tax break on day care expenses is considered a credit (not a deduction). It’s 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’re in the 20 percent tax bracket, a $1,000 deduction will save you $200. A 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.
When calculating the credit you can receive on your day care expenses, the total amount you use may not be more than $8,000 for one qualified dependent or $16,000 for two or more qualifying dependents. If you received other dependent care benefits — such as a Dependent Care Account — the same expenses cannot be applied to both benefits.
According to IRS Form 2441 (the form used for the child care tax credit), the credit itself is worth between 1 to 50 percent of the qualifying expenses you claim, depending on your income. If your adjusted gross income (AGI) is $125,000 or less, you qualify for the full 50 percent. The following table will show you how much of a credit you can qualify for.
|Income Level||Tax Credit Savings|
|AGI < $125,000||50%|
|AGI $125K – $185K||50% – 20%|
|AGI $185K – $400K||20%|
|AGI $400K – $440K||20% – 1%|
|AGI > $440,000||None|
The tax credit in the two income levels with a sliding scale are calculated by decreasing your savings by 1% for every $2,000 of AGI you have.
As most families will fall between the 20 percent and 50 percent tax credit area, the maximum credit that can be expected is $1,600 – $4,000 for families with one child and $3,200 – $8,000 for families with two or more children. But even if your day care expenses don’t maximize the child care tax credit, even the smallest amount can be helpful.
“(The tax credit) bumped my return up by a few hundred dollars for one kid,” said Jaclyn Curtis, a writer in Detroit, Michigan.
Is my child a qualified dependent?
In most cases, as long as your child is under age 13, they qualify as your dependent. It gets a little more complicated for qualified dependent children with divorced or separated parents or parents living apart.
The custodial parent will typically be able to claim a tax credit for day care expenses, even if they cannot or do not claim the child as an exemption on their own return. The custodial parent is considered the parent with whom the child or children spent more nights within a tax year. If they spent 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 parents living apart.
Who can claim the tax credit?
To qualify for a tax credit on your day care expenses, you have to meet four sets of criteria set by the IRS.
You must have earned income from employment, such as wages or salary from a job. If you’re married and filing jointly with your spouse, your spouse must also have earned income. Self-employment counts, and full-time students and people who are disabled are exempt from this requirement.
Your adjusted gross income cannot exceed $440,000 for the 2021 tax year.
You must have a filing status of Single, Married Filing Jointly, Head of Household, or Qualifying Widow or Widower with a Qualified Dependent. Married Filing Separately filing status does not qualify for the credit.
You must have paid for care in order for you and your spouse to be able to work, look for work, attend school, or if you are disabled.
Some parents may not realize they’re able to claim the credit because of the nature of their work. Mary Beth Foster is a freelance writer in North Carolina. Initially, she and her husband were unsure if they qualified because of her self-employment status.
“Because of the freelance nature of my work, he wasn’t sure (if) writing at Starbucks sometimes counted,” she said.
But a little research on their part assured them they met the requirements.
“We figured we ended up saving the few hundred dollars I owed in taxes for my freelance writing since they weren’t taken out of my checks,” Foster said.
What counts as a child care-related expense?
The IRS considers most types of paid child care eligible for the credit. Qualified expenses for day care, babysitters, nannies, and domestic workers (like a maid or cook) who provide child care in the scope of their duties all count. You can even claim the credit for expenses paid for day camps and summer camps, even if the camp is centered around an activity or sport, as long as the camps provided care while you and/or your spouse were working or looking for work.
Preschool expenses also count toward the tax credit. According to TurboTax, expenses related to preschool, nursery school, and other pre-kindergarten programs that can otherwise be considered day care are eligible for the credit.
Expenses related to kindergarten and schooling beyond that do not count for the credit. However, before- and after-school care costs do qualify, as do expenses related to a nurse or other care provider for a qualified disabled dependent. Overnight camps are not considered qualified expenses.
What forms do I need if I qualify?
If your day care expenses qualify for a tax credit, you’ll need to figure out how to go about claiming it on your tax return. It can seem daunting to add yet another form to your already lengthy return, but this one is well worth it.
You’ll need to complete IRS Form 2441 and submit it with your return. E-file tax sites — like eFile and TurboTax — make the process easy. If you use a tax professional to file your taxes, make sure to tell them of your intention to file and provide them with all the necessary information required on the form.
“I used it for several years while I had two kids,” said Linda Cuckovich, a freelance professional in northern California. “Getting the Tax ID Number and the invoices was the hardest part, but it wasn’t really tough.”
Some child care providers will send you the required information at the beginning of the year. With others, you’ll need to ask for the information yourself. You’ll 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 handing it over to your accountant or tax preparation professional or plugging the numbers into your e-return.
What if I don’t qualify?
If your day care expenses don’t qualify for the child care tax credit, don’t worry. There are plenty of other child-related deductions or credits that may help you save a little money or get a little more back from Uncle Sam.
The Child Tax Credit provides up to $3,000 per child under age 18 ($3,600 for children under age 6), if you meet certain requirements.
The number of children you have can determine your eligibility for the Earned Income Tax Credit, which can be a huge savings. For example, in 2021, if you have three or more children and earn less than $51,464 as a single person or $57,414 as a married couple, you are eligible for this credit.
There are several credits for education-related expenses, such as the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit. Keep in mind, at the federal level, only college-related expenses qualify for tax credits. But the value of these tax credits ranges from $1,800 to $2,500.
The Adoption Tax Credit helps parents who adopted a child in the tax year. Any child under 18 or children with special needs who cannot care for themselves are eligible. In 2017, the maximum adoption credit was $13,570 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. While these investments aren’t a deduction or credit, the interest earned in an authorized 529 plan isn’t subject to federal income taxes. Additionally, you don’t have to pay federal income taxes on the money if it’s withdrawn and used for qualified higher education expenses.