8567 / When is a taxpayer entitled to claim the child and dependent care tax credit?

The child and dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses (a dependent who is a child must be under age 13 to qualify). Those expenses can include the cost of physically caring for the dependent—and also include household expenses, such as hiring someone to help with cooking and cleaning for a dependent, as long as the expenses are primarily for the benefit of the dependent.  The IRS noted that summer day camp expenses can also qualify, but expenses related to overnight camp cannot be used to figure the credit.

For 2024, the maximum eligible work-related childcare expense used to figure the credit is $3,000 for one qualifying child and $6,000 for two or more children.  The taxpayer multiplies the amount of childcare expenses incurred by a percentage.  The percentage varies depending on the taxpayer’s income.  Depending on their income levels, taxpayers can receive a credit worth up to 35% of their qualifying childcare expenses. Once the taxpayer’s income equals or exceeds $43,000, 20% of the expenses qualify.  The maximum amount of the credit cannot be more than the taxpayer's earned income for the year, or the smaller of the taxpayer or their spouse's earned income if the taxpayer is married.

To claim the credit, the taxpayer must complete and attach Form 2441 to Form 1040, 1040-SR, or 1040-NR.   The credit is entered on Schedule 3 (Form 1040), line 2.  The credit is typically nonrefundable.

The taxpayer claiming the credit must subtract employer-provided dependent care benefits, including those provided through a flexible spending account, from total work-related expenses when calculating the credit. The more a taxpayer earns, the lower the percentage of work-related expenses that are taken into account in determining the credit.

Taxpayers must provide a valid taxpayer identification number (TIN) for each qualifying person. Usually, this is the qualifying person’s Social Security number.  Taxpayers without a Social Security number must obtain an individual taxpayer identification number.

Editor’s Note: For 2021 only, the dependent care tax credit was fully refundable under the American Rescue Plan Act (ARPA). The maximum credit percentage was increased from 35 percent to 50 percent of qualifying dependent care expenses (the credit phases down to 20 percent for taxpayers with income between $125,000 and $183,000). The level of qualifying dependent care expenses also increased for 2021—from $3,000 to $8,000 for a single qualifying dependent and from $6,000 to $16,000 for two or more qualifying dependents.  The IRS released FAQ to help taxpayers understand the expanded child and dependent care tax credit in 2021. As always, to claim the credit, taxpayers were required to have earnings. The FAQ was clear that the amount of qualifying work-related expenses claimed could not exceed the taxpayer’s earnings.

However, the credit was fully refundable for the first time in 2021 (the refundable nature of the credit was not extended beyond 2021). That allowed an eligible taxpayer to receive the credit even if they owed no federal income tax. To be eligible for the refundable credit In 2021, a taxpayer (or the taxpayer’s spouse on a joint return) had to reside in the United States for more than half of the year.