Raising children while balancing a career is expensive, but tax relief is available to help lighten the load. If you pay for child care or dependent care so you can work, actively look for work, or attend school, you may qualify for the Child and Dependent Care Credit (CDCC).
This overview covers what you need to know to make the most of it: eligible care expenses, expense caps, income phaseout rules, and the IRS documentation required to claim the credit.
What Is the Child and Dependent Care Credit?
The Child and Dependent Care Credit is a nonrefundable federal tax credit designed to offset working families' care costs. Unlike a tax deduction, which simply lowers your taxable income, a tax credit directly reduces your total tax liability dollar-for-dollar.
1. Who and What Qualifies for the Credit?
To claim the credit, both the individual receiving care and the expenses incurred must meet specific IRS guidelines.
Who Is a Qualifying Individual?
Children under age 13: Must be your dependent and live with you for more than half the tax year.
Incapacitated dependents or spouses: A spouse or dependent of any age who is physically or mentally unable to care for themselves and lived in your home for more than half the year.
What Expenses Are Eligible?
Expenses qualify only if they are necessary for you (and your spouse, if filing jointly) to work or look for work. Qualifying options include:
Daycare and nursery schools: Licensed daycare centers, preschools, and nursery programs below the kindergarten level.
Before- and after-school care: Care programs provided before or after standard school hours.
In-home care: Nannies, au pairs, and babysitters.
Day camps: Summer or holiday day camps, including sports, arts, or science camps.
Ineligible Expenses
The IRS excludes the following costs:
Overnight camps: Any camp program with an overnight stay.
Educational tuition: Private school tuition for kindergarten and higher grades.
Payments to relatives: Payments made to your spouse, the child's other parent, or any dependent claimed on your tax return (including your own child under age 19).
Extracurricular costs: Clothing, tutoring, transportation, or private lessons, unless they're included in the basic care fee.
2. Credit Limits, Calculations, and Income Phaseouts
The amount you can claim depends on the number of qualifying dependents, your total eligible expenses, and your adjusted gross income (AGI).
Maximum Qualified Expense Caps
The IRS limits the annual care costs eligible for the credit to:
$3,000 for one qualifying individual.
$6,000 for two or more qualifying individuals.
Important note on dependent care FSAs: If your employer offers a pre-tax Dependent Care Flexible Spending Account (FSA), the tax-free dollars you use reduce your allowable expense limit dollar-for-dollar. For example, if you use $5,000 from an FSA for two children, only $1,000 of remaining expenses can count toward the credit. Starting in 2026, the FSA limit rises to $7,500 per household, so a family that maxes out its FSA will have nothing left to claim for the credit.
Credit Percentage and Income Phaseouts (2026 and Later)
The credit is a percentage of your allowable care expenses. Starting with the 2026 tax year, the rates are higher for many families:
AGI of $15,000 or less: 50% (up to $1,500 for one child, $3,000 for two or more).
AGI of $15,001 to $43,000: The rate drops 1% for each $2,000 of AGI above $15,000, down to 35%.
AGI of $43,001 to $75,000 ($150,000 for married couples filing jointly): 35% (up to $1,050 for one child, $2,100 for two or more).
AGI above $75,000 ($150,000 joint): The rate drops 1% for each $2,000 ($4,000 joint) of AGI above that level, down to 20%.
AGI above $103,000 ($206,000 joint): 20% (up to $600 for one child, $1,200 for two or more).
For your 2025 return, the older rules still apply: a top rate of 35% that phases down to 20% once AGI is above $43,000.
Key Takeaways
No upper income cap: Higher-income taxpayers are never phased out completely. They remain eligible for a baseline credit rate of 20%.
Nonrefundable: The credit can reduce your federal income tax to zero, but it can't generate a refund beyond what you owe.
3. IRS Filing Requirements: How to Claim the Credit
To claim the credit, complete IRS Form 2441 (Child and Dependent Care Expenses) and attach it to your Form 1040.
Key Information Required
Care provider information (Part I): The provider's full name and address, their Taxpayer Identification Number (an EIN for commercial centers or an SSN for individual caregivers), and the total amount you paid each provider during the year.
Qualifying individual details (Part II): The name, SSN, and qualifying expenses for each dependent.
Earned income requirement: Both spouses (if filing jointly) must have earned income, such as wages, salaries, or self-employment earnings. Exceptions apply if a spouse was a full-time student or unable to care for themselves.
Frequently Asked Questions
Can I claim the Child and Dependent Care Credit if I am self-employed?
Yes. As long as you have net earnings from self-employment and meet the other requirements, you can claim the credit.
What if my daycare provider refuses to share their Social Security Number or EIN?
You can still claim the credit by showing due diligence. File Form 2441 with an explanation showing that you requested the information, such as a copy of Form W-10 you gave the provider.
Can I claim overnight summer camps for my kids?
No. Overnight camps are excluded from qualifying expenses under IRS rules.
Conclusion
The Child and Dependent Care Credit is a valuable tool for working parents to offset rising care costs. Keep detailed receipts and get your care provider's EIN or SSN early. If you'd like help making sure you're getting the full credit, or deciding between the credit and a dependent care FSA, reach out to Bottala Tax & Advisory at info@bottalacpa.com or (626) 244-8895.