Raising a child can be one of the most rewarding experiences in life. Raising children is also expensive. The Child and Dependent Care Tax Credit can help ease some of the financial burden.
What Is the Child and Dependent Care Tax Credit?
The Child and Dependent Care Tax Credit is a tax credit that helps offset the cost of caring for children or other dependents so the parent or caretaker can work or look for work. The credit allows eligible individuals and families to claim a portion of certain care-related expenses on their tax return, which can reduce their overall tax burden.
Who Qualifies for the Credit?
The credit may be claimed if all the following apply:
- The taxpayer paid for care so that the taxpayer (and spouse, if married) could work or look for work.
- The taxpayer has a qualifying individual whom the taxpayer cares for, including:
- A child under age 13
- A spouse who is physically or mentally unable to care for themselves
- Another dependent who lives with the taxpayer for more than half the year and cannot care for themselves
- Additional rules apply for married couples:
- Married taxpayers generally must file jointly, although certain married taxpayers living apart may qualify while filing separately
- Both spouses must have earned income unless one spouse is a full-time student or disabled
- For divorced or separated parents, generally only the custodial parent may treat the child as a qualifying individual for this credit.
What Expenses Qualify?
Qualifying expenses are expenses paid for care that allow the taxpayer to work or look for work. Common examples of qualifying expenses include:
- Babysitters or nannies
- Daycare centers
- Before or after-school care programs
- Day camps (not overnight camps)
- Care for a disabled spouse or dependent
- Household services related to care, such as a housekeeper who also provides caregiving
If the taxpayer uses a dependent care FSA or receives employer-paid dependent care benefits, the taxpayer generally cannot use those same expenses for the credit.
What Expenses Do Not Qualify?
The following expenses do not qualify for the credit:
- Food (in most cases)
- Clothing
- School tuition or tutoring (education costs)
- Overnight camps
- Entertainment expenses
How Much Is the Credit Worth?
The amount of the credit depends on earned income and eligible expenses.
- For one qualified child or dependent, up to $3,000 of expenses may be used. For two or more, the limit increases to $6,000. This limit applies to qualified expenses.
- For tax year 2026, the credit is equal to 20% to 50% of eligible expenses.
- Single and married taxpayers earning under $15,000 are eligible for the 50% credit. The maximum potential credit that could be claimed would be $1,500 for one dependent and $3,000 for two or more dependents.
- The credit percentage reduces in increments to 35% for incomes up to $75,000 if single or $150,000 if married.
- The credit is then incrementally reduced to 20% until income reaches $105,000 if single or $210,000 if married. Incomes above this threshold can claim the 20% credit.
Key Cautions:
- This credit is nonrefundable; the value of the credit is limited to tax liability. The credit can reduce tax liability to zero but not below.
- Qualifying expenses cannot be more than earned income. Earned income is from jobs or self-employment income. Unearned income such as dividends, interest, and capital gains do not apply.
- For married couples, expenses are limited by the lower-earning spouse’s income. If the spouse has $1,000 in earned income (and earns the least), the qualifying expenses to determine the credit would be $1,000.
- Payments to certain family members do not qualify, including payments to their spouse or to their child under age 19.
What Information Is Needed to Claim the Credit?
To claim the credit, the taxpayer must provide information about their care provider(s), including:
- Name
- Address
- Social Security Number (SSN) or Employer Identification Number (EIN)
Taxpayers can request the provider to complete Form W-10. This will provide the information necessary (other than qualifying expenses for each dependent) needed to claim the credit.
Also, most providers have annual statements that include all the information necessary to claim the credit.
Additionally, the qualifying child or dependent’s SSN needs to be reported to claim the credit.
The Child and Dependent Care Tax Credit can provide tax savings for families paying for care so they can work. If you have paid for childcare or dependent care during the year, it is worth reviewing whether you qualify. Keeping clear records of your childcare expenses throughout the year will help ensure you receive the maximum benefit available. If you have any questions regarding the Child and Dependent Care Tax Credit, contact the professionals at Gilliam Bell Moser today.
This article is not intended to be tax advice.
