What is the child and dependent care credit?
If you have a child or other dependent and work outside the home, you may need to pay someone to care for your loved ones. Fortunately, the child and dependent care credit may provide some financial relief. The child and dependent care credit is an income tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work.
To be eligible for this credit, you must provide care for a qualifying person, possess earned income, and incur work-related expenses.
Tip: A tax credit represents a dollar-for-dollar reduction of your income tax liability. A deduction, in contrast, only reduces your taxable income.
Can you take the child and dependent care credit?
There are several tests that determine if you may take the credit; you must meet all of them.
The care must be for one or more qualifying persons who are identified on the form you use to claim the credit
A qualifying person is:
- Your qualifying child who is your dependent for whom you can claim an exemption and who was under age 13 when the care was provided (to be your qualifying child, a child must live with you for more than half the year and meet other requirements),
- Your spouse who was physically or mentally unable to care for himself or herself and lived with you for more than half the year, or
- A person who was physically or mentally unable to care for himself or herself, who lived with you for more than half the year, and either was your dependent relative for whom you can claim an exemption or would have been your dependent except that he or she had (1) gross income equal to or in excess of the personal exemption amount ($4,050 in 2016 and 2017), or (2) he or she filed a joint return, or (3) you, or your spouse if filing jointly, could be claimed as a dependent on someone else’s tax return.
Special rules apply in the case of divorced or separated parents. Only the custodial parent may claim the child and dependent care credit, regardless of whether the noncustodial parent may claim the dependency exemption. The custodial parent is defined as the parent with whom the child shares the same principal residence for the greater portion of the calendar year. For more information, see IRS Publication 501.
You (and your spouse if you’re married) must have earned income during the year
Earned income includes:
- Other employee compensation
- Net earnings from self-employment
- Strike benefits
- Any disability pay you report as wages
- Parsonage allowances
- Meals and lodging furnished for the convenience of your employer
- Voluntary salary deferrals
- Military basic quarters and subsistence allowances and in-kind quarters and subsistence
- Military pay earned in a combat zone
Earned income doesn’t include:
- Pensions or annuities
- Social Security payments
- Workers’ compensation
- Unemployment compensation
- Scholarship or fellowship grants except amounts paid to you for teaching, research, or other services
Your child and dependent care expenses must be work-related
Expenses are considered to be work-related only if both of the following are true: (1) they allow you (and your spouse if you’re married) to work or look for work, and (2) they’re for a qualifying person’s care. If you’re married, both you and your spouse generally must work or look for work. Your spouse is treated as working during any month he or she is a full-time student or is physically or mentally unable to care for himself or herself. Your work can be for others or in your own business or partnership. It can be either full-time or part-time.
Work also includes actively looking for work. However, if you don’t find a job and have no earned income for the year, you can’t take this credit. That’s because the credit can’t exceed your earned income.
Whether the expenses you incur are necessary to allow you to work or look for work depends on the facts. In general, dependent care expenses for a period in which you are absent from work are not employment-related. However, if your absence from work is short and temporary (e.g., you have a minor illness or take a brief vacation) and you pay dependent care expenses on a weekly or longer basis, the expenses you pay for child and dependent care during this time will be considered work-related.
Tip: If you work part-time, you generally must figure your expenses for each day. However, if you are required to pay for dependent care expenses on a weekly or longer basis, you will not be required to allocate expenses between days worked and days not worked.
To qualify as work-related, your expenses must be incurred to provide care for a qualifying person. Such expenses are considered to be for the care of a qualifying person if the main reason they are incurred is to assure that person’s well-being and protection. Here are some examples of expenses that may qualify as work-related, assuming specific requirements are met:
- Expenses you incur for some household services (such as the cost of a housekeeper, maid, or cook)
- Fees paid to obtain care (including application fees, agency fees, and deposits) when and if care is actually provided
- The cost of preschool, nursery school, or other similar programs below kindergarten
- Expenses for before-school and after-school care programs
- Expenses for day camps (even for camps that specialize in certain activities)
- The amount you pay to a dependent care provider to transport your child to and from care, even if that cost is billed separately from other care expenses
Tip: Payments for services provided outside your home are qualified only if they are incurred for the care of a dependent under age 13, or for any other qualifying individual who regularly spends at least eight hours each day in your home.
Here are some examples of expenses that generally do not qualify as work-related:
- Amounts you pay for food, clothing, and entertainment, unless these are small amounts paid that are incidental to and cannot be separated from the cost of caring for the qualifying person
- Expenses to attend kindergarten or a higher grade (these are considered primarily educational, not work-related, expenses)
- The cost of sending your child to an overnight camp
- The cost of transporting your child between home or school and a dependent care location (e.g., by bus, car, taxi, or subway), unless the dependent care provider is furnishing the transportation