Daycare Tax Credits Explained
The Child and Dependent Care Credit can save you hundreds or even thousands of dollars at tax time. Here's how to maximize your savings.
Quick Summary
The Child and Dependent Care Credit gives you back 20-35% of qualifying childcare expenses, up to $3,000 for one child or $6,000 for two or more children. That's a potential $600-$2,100 tax credit.
What Is the Child and Dependent Care Credit?
This is a federal tax credit (which reduces your tax bill dollar-for-dollar) for working parents who pay for childcare so they can work or look for work. Unlike a deduction, a credit directly reduces the taxes you owe.
Do You Qualify?
Eligibility Requirements
- You (and your spouse, if married) must have earned income
- Child must be under 13 (or any age if disabled and unable to care for themselves)
- Childcare must be for work purposes (or actively looking for work)
- You must file as single, head of household, or married filing jointly
- You must identify your care provider (name, address, tax ID)
How Much Is the Credit?
The credit is a percentage of your qualifying expenses. The percentage depends on your adjusted gross income (AGI):
| Your AGI | Credit % | Max Credit (1 child) | Max Credit (2+ children) |
|---|---|---|---|
| $0 - $15,000 | 35% | $1,050 | $2,100 |
| $15,001 - $43,000 | 35% - 20%* | $1,050 - $600 | $2,100 - $1,200 |
| $43,001+ | 20% | $600 | $1,200 |
*Credit percentage decreases by 1% for each $2,000 of income above $15,000
What Expenses Qualify?
Qualifies
- • Licensed daycare centers
- • Home daycare providers
- • Nannies and babysitters
- • Before/after school programs
- • Day camp (summer programs)
- • Au pairs (for childcare portion)
Does NOT Qualify
- • Overnight camps
- • Private school tuition (grades K+)
- • Food and clothing
- • Medical expenses
- • Payments to your spouse or your child under 19
- • Care by a parent who doesn't live with you
FSA vs Tax Credit: Can You Use Both?
Yes, but not for the same dollars. Here's how they work together:
- 1.First, use your Dependent Care FSA (up to $5,000)
- 2.Then, apply the tax credit to remaining expenses (up to $3,000 for one child or $6,000 for two)
- 3.Important: FSA contributions reduce your qualifying expenses for the credit
Example
You spend $12,000/year on daycare for two children. You contribute $5,000 to your FSA. That leaves $7,000, but the tax credit cap is $6,000 for two children. So you claim the credit on $6,000 of expenses.
How to Claim the Credit
1. Keep Records
Save all receipts, invoices, and statements from your childcare provider throughout the year.
2. Get Provider Tax ID
You'll need your provider's name, address, and Tax ID (EIN or SSN). Most daycares provide this automatically; ask if you don't have it.
3. File Form 2441
Complete IRS Form 2441 (Child and Dependent Care Expenses) and attach it to your Form 1040.
Important Note
This is a non-refundable credit, meaning it can only reduce your tax to zero—you won't get a refund if the credit exceeds what you owe. However, most families with childcare expenses owe more than the credit amount.
Calculate Your Tax Savings
Use our calculator to estimate your total tax savings from FSA and tax credits combined.
Open Tax Savings CalculatorCommon Tax Credit Mistakes to Avoid
Many families leave money on the table by making these common errors when claiming the Child and Dependent Care Credit:
Not Getting the Provider's Tax ID
You must have your provider's name, address, and tax identification number (EIN or SSN). Without it, you cannot claim the credit. Request this information at enrollment and keep it on file. Most licensed centers provide this automatically, but you may need to ask home daycare providers.
Forgetting FSA Coordination
If you use a Dependent Care FSA, those expenses reduce the amount you can claim for the tax credit. Running the numbers with our calculator helps you find the optimal split between FSA contributions and credit-eligible expenses.
Including Non-Qualifying Expenses
Only childcare that enables you to work qualifies. Food, clothing, overnight camp, and private school tuition (K-12) don't count. If your provider bundles services, ask for itemized billing showing childcare separately.
Not Meeting Work Requirements
Both spouses must work or actively look for work. If one spouse is a full-time student, they're treated as having earned $250/month (one child) or $500/month (two+ children). Stay-at-home parents don't qualify unless they're searching for work or a student.
State Tax Credits for Childcare
Many states offer their own childcare tax credits in addition to the federal credit. These state credits can provide significant additional savings:
| State | Credit Type | Maximum Benefit |
|---|---|---|
| California | Percentage of federal credit | Up to 50% of federal (lower incomes) |
| New York | Percentage of federal credit | Up to 110% of federal credit |
| Colorado | Refundable credit | Up to 50% of federal (income-based) |
| Oregon | Working Family Credit | Refundable, income-based |
| Massachusetts | Household dependent credit | $480 per dependent |
Check your state's tax agency website or consult a tax professional for current state credit eligibility and amounts.
Tax Credit vs. FSA: When to Use Each
Understanding when to prioritize the Dependent Care FSA versus the tax credit can maximize your total savings.
When FSA Wins
For most families earning over $50,000, the FSA provides greater savings because you avoid both income tax (22-35%) AND FICA taxes (7.65%). That's roughly 30-43% savings on $5,000. The tax credit maxes at 20% for higher earners. If you have two or more children, you may benefit from using both.
When Tax Credit Wins
Lower-income families (AGI under $25,000) get up to 35% back through the credit. If your employer doesn't offer an FSA, the credit is your only option. One-child families with under $8,000 in childcare expenses may find the tax credit simpler to use.
Optimal Strategy for Most
For most two-income families: Max out your FSA ($5,000), then claim the tax credit on remaining eligible expenses up to the cap. With two children and $15,000 in annual childcare costs, you'd use $5,000 in FSA and claim the credit on $6,000 of remaining expenses.
Special Situations
Divorced or Separated Parents
Only the custodial parent (the one with whom the child lives more than half the year) can claim the credit—even if the non-custodial parent claims the child as a dependent for other tax purposes. If you share custody exactly 50/50, the parent with higher AGI is treated as custodial for this credit.
Working from Home
Remote workers can still claim the credit. What matters is that you're working, not where. Even if you work from home, paying for childcare so you can focus on work qualifies. The childcare must be for work purposes—not so you can run errands or have personal time.
Paying a Family Member
You can claim childcare provided by grandparents, aunts, or other relatives—as long as they're not your spouse, your child under 19, or the child's parent. The relative must report the income and pay applicable taxes. Family member care must be a legitimate business arrangement, not informal help.
Part-Year Employment
If you or your spouse was out of work for part of the year, you can only claim childcare expenses for the months you were working (or actively looking for work). Keep records of when you started and ended employment to document qualifying periods.
Record-Keeping Requirements
The IRS may request documentation to support your credit claim. Keep these records for at least three years after filing:
Frequently Asked Questions
Can I claim daycare expenses if I'm self-employed?
Yes. Self-employed individuals qualify as long as the childcare enables them to work. You can also set up a Dependent Care FSA through a Solo 401(k) or certain other arrangements, though this requires more planning. Consult a tax professional familiar with self-employment benefits.
What if my provider refuses to give their tax ID?
You can still claim the credit if you can show you made a reasonable effort to get the information. Document your requests in writing. However, be cautious—providers who won't share tax IDs may be operating illegally or evading taxes. This is a red flag about their professionalism.
Does summer camp count?
Day camps qualify—the expense is for childcare while you work. Overnight camps do not qualify. If a camp includes both day programs and overnight stays, only the day program portion counts. Sports camps, art camps, and educational day camps all qualify as long as they're primarily for childcare.
Can I claim care for a disabled adult dependent?
Yes. The credit applies to any dependent who is physically or mentally incapable of self-care and lives with you for more than half the year. There's no age limit for disabled dependents. The care must still be for work purposes.
What if both parents work part-time?
Both parents must have earned income to qualify. Your qualifying expenses are limited to the lower earner's income. If one spouse earns $20,000 and the other earns $50,000, you can claim up to $20,000 in expenses (subject to the $3,000/$6,000 cap).
Is preschool tuition tax deductible?
Preschool (for children under kindergarten age) counts as qualifying childcare for the credit. Once your child enters kindergarten, only before/after school care qualifies—not tuition. The distinction is that preschool enables you to work, while K-12 education is primarily educational.
What happens to unused FSA funds?
Unlike the tax credit, FSA funds are "use it or lose it." Estimate carefully to avoid forfeiting money. Some employers offer a grace period (2.5 months into the next year) or allow up to $610 to roll over. Check your plan's rules. The tax credit has no similar deadline issue.
Can I amend past returns to claim the credit?
Yes. You can file Form 1040-X to amend returns for up to three years from the original filing deadline. If you overlooked the credit in previous years, it may be worth reviewing. Gather your provider information and expense records before amending.
How does this interact with the Child Tax Credit?
These are separate credits—you can claim both. The Child Tax Credit ($2,000 per child) is for having children, while the Child and Dependent Care Credit is for paying for childcare. They have different eligibility rules and different forms, but both can reduce your tax bill.
What if I get audited?
Keep organized records and respond promptly to IRS requests. Common audit triggers include claiming expenses that don't match your work schedule or provider information that doesn't verify. Having complete documentation (receipts, provider tax ID, work records) typically resolves audits quickly.
The Bottom Line
The Child and Dependent Care Credit can save your family $600-$2,100+ annually. Combined with a Dependent Care FSA, total savings can exceed $3,000 per year. Key takeaways:
- •Keep records of all payments and provider information throughout the year
- •Get your provider's tax ID at enrollment—you'll need it at tax time
- •Coordinate FSA contributions and tax credit claims for maximum savings
- •Check if your state offers additional childcare tax credits
- •Use Form 2441 when filing to claim the federal credit
With childcare costs consuming a significant portion of family budgets, taking full advantage of available tax benefits is essential. Don't leave money on the table—use our tax savings calculator to estimate your specific savings.