The child and dependent care credit explained

The child and dependent care credit offsets childcare costs for low- to moderate-income families, delivers significant tax savings, and can be claimed alongside other above-the-line deductions and tax credits.

Let’s take a closer look at how the dependent care tax credit works, what counts as qualified expenses, and how to make the most of this valuable federal tax benefit on your tax return.

What is the child and dependent care credit?

The child and dependent care credit (CDCTC) is a tax credit for eligible expenses involved in caring for qualified dependents. Parents and caregivers can claim this credit on their federal income tax return if they and their qualifying dependents meet certain criteria.

To claim care expenses, the qualifying person or dependent must have been under age 13 when the care was provided or be a spouse or individual who is physically or mentally incapable of self-care. Additionally, either you (or your spouse if you’re filing a joint tax return) must have incurred the care expenses while working or looking for work.

Read more: 7 free tax filing options

How the child and dependent care credit works

The child and dependent care credit is a nonrefundable, dollar-for-dollar credit. This means that if you have a tax bill, the qualifying expenses that determine your credit amount could lower your tax liability to zero but won’t trigger a refund. If you don’t owe taxes, you can’t get money back by claiming this tax benefit on your federal tax return.

The child and dependent care credit is available to all taxpayers regardless of earned income. However, your income does determine the amount of credit you can receive, up to a maximum of $3,000 per qualifying dependent child or individual, or $6,000 for two or more dependents.

The portion of total expenses eligible to be claimed usually falls between 20% and 35% for most taxpayers. Most low-income families are eligible for some portion of the maximum credit rate percentage and will receive a significant tax break if they owe money to the IRS.

Read more: Child tax credit: Everything you need to know for the 2023 tax year

Qualifying for the child and dependent care credit: A step-by-step guide

The child and dependent care credit helps families reduce taxes owed and eases child poverty, but there are some rules for claiming it. Follow this step-by-step guide or use the IRS child and dependent care credit tool to ensure you qualify before submitting your tax return.

Step 1: Clarify your filing status and adjusted gross income

To claim the child and dependent care tax credit, your filing status needs to be married filing jointly, or you must be the primary custodial caregiver if you are divorced or separated parents. For divorced or separated parents with joint custody, the IRS says the parent with the higher income can claim this credit.

While this tax credit doesn’t have income limits, you must have earned actual income during the tax year to qualify. Investment income, Social Security and unemployment benefits, and retirement income don’t qualify as earned income for this credit. Calculate your adjusted gross income (AGI) to determine what percentage of qualifying expenses you’ll be eligible to claim.

For taxpayers who are married filing jointly and one spouse is a full-time student, that spouse is treated as having earned income for each month they are enrolled full-time.

Read more: What is the earned income tax credit and do you qualify?

Step 2: Determine if you have a qualifying child or dependent

If your filing status and income mean you’re eligible for this credit, the next step is to see if the following criteria fit the dependent whose care costs you’re trying to claim.

• The person is claimed as a dependent on your tax return.

• If it’s a qualifying child, they are under the age of 13.

• If not under 13, the dependent person is a spouse or other individual who is physically or mentally unable to care for themselves.

• They have lived with you for more than half the year.

IRS publication 503 details specific rules and exceptions for spouses who live apart or those who only provide financial support to a dependent for a certain portion of the year.

Step 3: Check if your dependent care expenses are eligible

There are two components that define which expenses are eligible for the child and dependent care tax credit: the kinds of costs and the care provider. While the IRS has pretty generous rules about who qualifies as a care provider, certain family members (such as your spouse or a grandparent) and some household employees don’t qualify as care providers for this credit.

Some types of costs such as application fees or deposits may be excluded. And for divorced or separated parents, child support payments are not eligible expenses.

The rules are also tricky for dependent care benefits received through an employer-sponsored care facility, so consult the IRS website for more information before you fill out your tax form.

Step 4: Gather your documentation

The IRS requires records and receipts for the eligible expenses you’ve paid as well as the taxpayer identification number or Social Security number of the person or organization who provided care.

For those filing for the CDCTC for an adult dependent or spouse who can’t care for themselves, you may be asked to provide proof of the nature, extent, and duration of the disability.

Step 5: Fill out Form 2441

Once you’ve double-checked eligibility and gathered your records, you’ll use IRS Form 2441 to claim the tax credit in your tax return forms.

Keep in mind that for future tax years, it may make sense to take advantage of an employer-sponsored dependent care flexible spending account (DCFSA) that can provide up to $5,000 in pre-tax dollars to pay for childcare costs.

Child and dependent care credit frequently asked questions

1. Is the child and dependent care tax credit refundable?

The child and dependent care credit is not a refundable credit. This means it can reduce your tax bill but it can’t generate a refund.

2. How is this credit different from the child tax credit?

The child tax credit (CTC) is also a non-refundable tax credit aimed to help low- and middle-income families with the costs of raising a child. The additional child tax credit is the refundable portion of the child tax credit available to low-income families.

However, the CTC does not require submitting proof of expenses and instead offers a flat credit amount per dependent child to account for everyday household expenses such as rent, food, and more.

3. Can I claim this credit if I have an FSA for child care expenses?

While you can’t claim expenses for the child and dependent care credit that you paid for with funds from a flexible spending account, you may be able to use both in the same tax year.

For instance, if you emptied out your DCFSA on child care costs earlier in the year, any additional care expenses you incur could be eligible for the dependent care credit.