Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit helps working families offset childcare costs. Unlike the Dependent Care FSA (which reduces taxable income), this is a tax credit that directly reduces your tax bill.

2024-2025 Credit Details:

• Maximum Expenses: $3,000 for one child, $6,000 for two or more children
• Credit Percentage: 20-35% of expenses, depending on income
• Maximum Credit: $1,050 (one child) or $2,100 (two+ children)
• Income Phase-Out: Credit percentage decreases as income rises above $15,000

How the Credit Works:

Income-Based Percentage:

• Income under $15,000: 35% credit rate (maximum benefit)
• Income $15,000-$43,000: 35% reduced by 1% for each $2,000 over $15,000
• Income above $43,000: 20% credit rate (minimum)

Example Calculation: Family with 2 kids earning $80,000/year with $8,000 in childcare expenses:

• Qualified expenses: $6,000 (maximum)
• Credit rate at $80,000 income: 20%
• Credit amount: $6,000 × 20% = $1,200

Qualified Expenses:

• Daycare and preschool
• Before/after school care
• Summer day camps (not overnight)
• In-home caregivers (nanny, babysitter)
• Adult day care for disabled dependents

Requirements:

• Must have earned income (wages, self-employment)
• Care must be for child under 13 (or disabled dependent)
• Care must allow you to work or look for work
• Cannot claim care provided by your spouse or child under 19
• Care provider must provide Tax ID or Social Security Number

**FSA vs. Tax Credit

• Which is Better?**

Dependent Care FSA is usually better if:

• Income over $43,000 (where credit rate is only 20%)
• In high tax bracket (22%+ federal + state)
• Employer offers FSA

Tax Credit is better if:

• Income under $43,000 (credit rate up to 35%)
• Employer doesn't offer FSA
• Childcare costs under $5,000/year

Cannot Double-Dip: Expenses reimbursed by FSA cannot be claimed for the tax credit. If you use $5,000 from FSA and have $8,000 in expenses, you can claim the credit on the remaining $3,000 (up to limits).

Pro Tip: For families with $6,000+ in childcare costs earning $100,000+, the optimal strategy is usually: Use Dependent Care FSA for $5,000 (saves ~$1,500-$2,000) + claim tax credit on remaining $1,000 of expenses (saves ~$200) = Total tax savings of ~$1,700-$2,200.