Federal Tax Break for Child & Dependent Care Expenses

IRS Tax Credit for Parents & Guardians

Did you pay for daycare, summer camp, or a babysitter to care for your kids during 2018? Or did you pay a care provider to look after your dependent (e.g., spouse or qualifying individual) while you were working? If so, you may be able to claim a tax credit for the expenses you paid to a certified care provider.

A tax credit is a dollar-for-dollar reduction of your income tax liability. For example, if you owe $5,000 in taxes, a $1,000 tax credit will reduce your tax balance to $4,000. (On the other hand, a tax deduction reduces your taxable income so you’ll have less overall income that is subject to taxation.)

Keep in mind that the IRS recently overhauled the 1040 individual tax return, which will change the way you report your income and claim tax breaks. The 1040 is now postcard-sized and there is no longer a Form 1040A or Form 1040EZ. These changes stem from the Tax Cuts and Jobs Act (TCJA).

The Child and Dependent Care Tax Credit

The IRS offers a federal tax credit for individuals who are paying expenses for the care of their children or dependents. You must have a qualifying child or dependent, and the tax break only applies to certain eligible expenses. There are a number of tests you need to meet for the Child and Dependent Care Credit, but there are also some exceptions to these requirements.

This tax credit is a percentage of the amount of eligible expenses you paid to a care provider for your qualifying child/dependent. The percentage is based on your adjusted gross income (AGI). For tax year 2018, you can claim a tax credit of up to $3,000 for one qualifying individual (e.g., your child or dependent) or up to $6,000 for two or more qualifying individuals.

According to the IRS, the money you spend on the care of a qualifying person is eligible “if the primary reason for paying the expense is to assure the individual’s well-being and protection” [IRS Tax Topic 602 – Child and Dependent Care Credit].

Are You Eligible to Claim the Child & Dependent Care Credit?

The IRS outlines a list of tests that you must pass in order to claim the Child and Dependent Care Credit. You must meet all of these requirements to be eligible for this tax credit.

Qualifying Person Test: The care must be for one or more qualifying persons (also referred to as qualifying individuals) who you’ve identified on IRS Form 2441 (Child and Dependent Care Expenses).

Earned Income Test: You (and your spouse if Married Filing Jointly) must have earned income during the year.

Work-Related Expense Test: You must have paid the child/dependent care expenses so that you (and your spouse if Married Filing Jointly) can work or actively look for work.

Qualified Care Provider Test: To qualify, the payments for care expenses cannot be made to someone you (and your spouse if Married Filing Jointly) can claim as a dependent on your tax return. For instance, if you pay your child to provide care (e.g., for a qualifying relative), your child cannot be your dependent and must be age 19 or older by the end of the tax year. Additionally, you cannot use payments to your spouse or the parent of your qualifying person (if your qualifying person is your child and is under age 13) to claim this tax credit.

Joint Return Test: Your filing status can be Single, Married Filing Jointly, Head of Household, or Qualifying Widow(er) with Dependent Child.

Provider Identification Test: You must identify the care provider on your income tax return.

Dollar Limit Test: If you receive dependent care benefits, your dollar limit for this tax credit may be reduced. For taxpayers who exclude or deduct certain care benefits that are provided by a dependent care benefit plan, the total amount that’s excluded/deducted must be less than the dollar limit for the qualifying care expenses (which is generally up to $3,000 for one qualifying person, or up to $6,000 for two or more qualifying persons).

You can use the IRS online tool to help determine your eligibility for this tax credit: Am I Eligible to Claim the Child and Dependent Care Credit?

Note that there are some exceptions to these eligibility tests. For details, see IRS Publication 503 (Child and Dependent Care Expenses).

Does Your Child or Dependent Qualify?

For the purposes of the Child and Dependent Care Credit, a qualifying individual is defined as one of the following:

• Your dependent qualifying child who is under age 13 when the care is provided

• Your spouse who is physically or mentally incapable of self-care and has lived with you for over half of the year

• An individual who is physically or mentally incapable of self-care, has lived with you for over half the year, and either: (i) is your dependent; or (ii) could have been your dependent except that he/she has gross income that equals or exceeds the exemption amount, or files a joint return, or you (or your spouse if filing a joint return) could have been claimed as a dependent on another taxpayer’s return that year.

Dependent: Generally, a dependent is a person (other than you or your spouse) for whom you can claim an exemption. The person must be your qualifying child or your qualifying relative in order to be considered your dependent for tax purposes.

Qualifying Relative: To claim an individual as your qualifying relative, there are a number of tests that the individual and you (and your spouse if Married Filing Jointly) must pass. A qualifying relative cannot be your qualifying child or the qualifying child of any other taxpayer. A qualifying relative must have lived with you all year as a member of your household, and you must have provided substantial financial support for that individual. For more details, see IRS Table 2 (Qualifying Relative Dependents).

Physically or Mentally Incapable of Self-Care: An individual is considered to be physically or mentally incapable of self-care if he/she is unable to take care of his/her own hygiene or nutritional needs (or requires the full-time attention of another person for the individual’s safety or the safety of others) as a result of a physical or mental defect. If you have a spouse or relative who fits this category, that means they can be considered a qualifying individual for the purposes of the Child and Dependent Care Credit.

Taxpayer Identification Number (TIN): You are required to provide the qualifying individual’s name and taxpayer ID number – usually his/her Social Security Number (SSN) – when you claim the tax credit and file your return.

You use the IRS online tool to help determine who qualifies as your dependent for federal tax purposes: Who May I Claim as a Dependent?

More information about dependents, qualifying children, and qualifying relatives can be found in the Instructions for IRS Form 1040.

To learn more about the Child and Dependent Care Tax Credit, see IRS Publication 503 (Child and Dependent Care Expenses).