How Child Care Costs Can Lower Your Taxes

Child care costs may reduce your federal income tax through two separate programs

Yes, child care expenses can lower your taxable income, but the rules depend on which program you use and your household situation. The two main routes are the Child and Dependent Care Credit (which reduces your tax bill directly) and Dependent Care Flexible Spending Accounts (which lets you set aside pre-tax money from your paycheck). You cannot use both for the same expenses in the same year, so you will need to figure out which saves you more money.

The credit and the account work differently: one is claimed on your tax return after the year ends, and the other comes out of your paycheck before taxes are calculated. Which one benefits you more depends on your income level and how much you spend on care.

Key Takeaways

The Child and Dependent Care Credit reduces your tax bill by up to 20 to 35 percent of what you spent on child care, depending on your income.
A Dependent Care Flexible Spending Account lets you set aside up to $5,000 per year (or $2,500 if married filing separately) in pre-tax dollars for child care.
You must choose one method per year — you cannot claim the credit and use the FSA for the same expenses.
Both programs require that you paid for care so you could work or look for work, and the care must be for a child under age 13 or a dependent who cannot care for themselves.

How the Child and Dependent Care Credit works

The Child and Dependent Care Credit is claimed on your federal tax return (Form 1040, Schedule 3) after the tax year ends. You report what you spent on child care — including daycare, preschool, summer camp, and after-school programs — and the IRS reduces your tax bill by a percentage of that amount.

The percentage ranges from 20 to 35 percent depending on your adjusted gross income (AGI). Households earning $15,000 or less get 35 percent back; the percentage drops as income rises, reaching 20 percent for households earning $43,000 or more. For example, if you earned $50,000 and spent $4,000 on child care, you would receive a credit of $800 (20 percent of $4,000).

The maximum expenses you can claim are $3,000 per year for one child or dependent, or $6,000 for two or more. This means the highest credit you can receive is $1,050 (35 percent of $3,000) for one child, or $2,100 for two or more children.

How Dependent Care Flexible Spending Accounts reduce your taxes

A Dependent Care Flexible Spending Account (FSA) is an employer-sponsored plan that lets you set aside money from your paycheck before federal income taxes are taken out. You then use that money to pay for child care expenses throughout the year.

The annual limit is $5,000 per household per year (or $2,500 if you are married filing separately). Because the money comes out before taxes, you avoid paying federal income tax, Social Security tax, and Medicare tax on that amount. If you are in the 22 percent federal tax bracket and set aside $5,000, you save roughly $1,100 in taxes (22 percent of $5,000), plus additional savings from Social Security and Medicare taxes.

The trade-off is that you must estimate how much you will spend and commit to that amount at the start of the year. If you do not spend all the money by the end of the year, you lose it — there is a grace period of up to 2.5 months into the next year, but after that, unused funds do not roll over. You enroll in your employer's FSA during open enrollment, usually once per year.

Which option saves you more money

Whether the credit or the FSA saves you more depends on your income, tax bracket, and how much you spend on care. Use this framework to compare:

If you earn less than $43,000, the credit percentage is higher (25 to 35 percent), so the credit may save you more than the FSA. If you earn more than $43,000 and are in a higher tax bracket (25 percent or above), the FSA may save you more because you avoid both income tax and payroll taxes. If you are unsure which is better, calculate both: multiply your child care expenses by the credit percentage, then multiply them by your combined federal, state, and payroll tax rate, and see which number is larger.

One important note: if you use an FSA, you cannot claim the credit for the same expenses. You must choose one method per year.

What expenses count as child care

Both the credit and the FSA cover similar types of care, but with specific rules. Covered expenses include daycare centers, in-home child care providers, preschool, after-school programs, and summer day camps. Overnight camps, school tuition (even for kindergarten), and babysitting for entertainment do not count.

The care must be provided so that you (and your spouse, if married) can work or look for work. If you are not working, the expenses do not may have access to. The child must be under age 13, or be a dependent of any age who is physically or mentally unable to care for themselves.

You will need to report the name, address, and tax ID (or Social Security number) of the person or facility providing the care. If you cannot obtain this information, you cannot claim the credit or use the FSA for those expenses.

How to claim the credit on your tax return

To claim the Child and Dependent Care Credit, you file Form 2441 (Credit for Child and Dependent Care Expenses) along with your Form 1040. You will need receipts or statements showing what you paid for child care, the dates of care, and the provider's name and tax ID.

If you are using tax software, the software will walk you through the questions and calculate the credit for you. If you are filing by hand or with a tax preparer, provide them with your child care receipts and they will complete Form 2441. The credit is non-refundable, meaning it reduces your tax bill but cannot result in a refund larger than the tax you owe.

Frequently Asked Questions

Can I use both the credit and the FSA in the same year?

No. You must choose one method per year for the same child care expenses. However, if you have multiple children or types of care, you could theoretically use the FSA for one child and claim the credit for another, but this is complex and rarely worth the effort. Most households pick one method and stick with it.

What happens if I do not spend all the money in my FSA?

You lose it. FSAs operate under a "use it or lose it" rule. You have until 2.5 months into the next year to spend the remaining balance, but after that, unused funds do not roll over to the following year. This is why it is important to estimate conservatively when you enroll.

Does my spouse's income affect the credit?

Yes, if you are married filing jointly, the credit is based on your combined adjusted gross income. If you are married filing separately, each spouse can claim the credit based on their own income, but the annual expense limit drops to $3,000 per household instead of $6,000.

Can I claim the credit if I am self-employed?

Yes. Self-employed parents can claim the credit based on their net business income. You cannot use an employer-sponsored FSA if you are self-employed, but you may be able to set up a Solo 401(k) with a dependent care FSA feature, depending on your plan. Consult a tax preparer for details on your specific situation.

Does the credit explore to nanny or babysitter payments?

Yes, if the nanny or babysitter is caring for your child while you work. You must report their name, address, and tax ID on Form 2441. If you pay a nanny more than $2,300 in a year, you are also required to withhold and pay Social Security and Medicare taxes on their wages.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.