How to deduct child care expenses on your taxes

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The federal government gives you a few options that might offset your child-related expenses when you file your taxes this year.

Whether you pay for day care, after school care, dependent care or summer camp, the following three tax credits might reduce what you owe the IRS and put some money back into your bank account. Together, these credits make up some of the most helpful ways for parents and caregivers to potentially lower their tax bills.

3 options to deduct child care expenses:

  • The child tax credit.
  • The child and dependent care credit.
  • The earned income tax credit.

The child tax credit

The child tax credit isn’t new. It does, however, have a few new features thanks to the Tax Cuts and Jobs Act passed in December of 2017. Taxpayers with children under age 17 (or other qualifying dependents) may be able to claim the Child Tax Credit if they can satisfy IRS qualification requirements.

How it works

  • The maximum credit is $2,000 for each qualifying child with a valid Social Security number.
  • Up to $1,400 of the credit is refundable.
  • You may be able to claim a tax credit of up to $500 for qualifying dependents who are over age 16 (as long as they are U.S. citizens, U.S. nationals, or U.S. resident aliens).
  • Taxpayers with a modified adjusted gross income over $200,000 ($400,000 if married filing jointly) cannot claim the full tax credit.

Because a portion of the child tax credit is refundable, it could potentially offset any taxes you owe. If a portion of the credit is leftover (up to $1,400), the IRS can issue it to you as a tax refund. The child tax credit is available to parents who qualify, whether or not they pay for child care expenses throughout the year.

The IRS provides an online interview that can help you determine if you qualify for the child tax credit.

The child and dependent care credit

Do you pay someone to take care of your child or other dependents in your household so you or your spouse can work? If so, the child and dependent care credit might help you lower your tax bill to the federal government.

Taxpayers with children under age 13 may be able to apply the credit to their tax returns, as long as they can meet IRS requirements. The credit may also be available if you have other dependents in your household, like a spouse, parents, or older children who aren’t physically or mentally able to care for themselves.

How it works

  • Take 20 to 35 percent of qualifying dependent care costs as a credit on your tax return (up to a limit). This credit applies on up to $3,000 in care-related expenses for one dependent or $6,000 for two or more.
  • The credit is available regardless of your income, but the percentage of allowable expenses (20 to 35 percent) can vary based on what you earn. The more income you earn, the smaller your percentage may be.
  • The credit isn’t refundable. So, while it may be used to lower your tax bill, the IRS won’t issue you any leftover portion as a refund.

You can find out if you’re eligible to claim the child and dependent care credit by completing an online interview on the IRS website.

The earned income tax credit

The earned income tax credit, also called EITC, helps workers with low to moderate income. Married couples filing jointly who earned $56,844 or less in 2020 may be eligible to claim the credit. However, both the maximum income limit and the size of the tax credit itself can vary based on factors such as filing status, number of children and earnings.

To claim this credit, the IRS has a list of requirements you need to satisfy. For example, you (along with your spouse and any qualifying children) must have a valid Social Security number. Your filing status can’t be married filing separately. Income limits also apply.

How it works

  • The earned income tax credit is refundable. If the credit reduces your tax bill to zero, you may get the leftover amount back in a refund from the IRS.
  • The maximum credit for 2020 is $6,660. This may be available to single, widowed or head of household filers with three or more qualifying children and an adjusted gross income of $50,954 or less. If married and filing jointly with three or more children, the income limit increases to $56,844.
  • The minimum EIC of $538 may be available to single filers with no qualifying children who earned $15,820 or less in 2020. For married filing jointly tax filers, the adjusted gross income limit is $21,710.

The charts below breaks down EIC income limits and maximum credit amounts further.

2020 earned income tax credit
income limits and maximum credit amounts
0 qualifying children 1 qualifying child 2 qualifying children 3+ qualifying children
Source: IRS
Single, head of household, or widowed $15,820 $41,756 $47,440 $50,954
Married filing jointly $21,710 $47,646 $53,330 $56,844
Maximum tax credit $538 $3,584 $5,920 $6,660

Not sure if you qualify for the credit? The IRS offers an EITC Assistant you can access online. Complete the online interview to learn if you’re eligible for the Earned Income Tax Credit.

Bottom line

Filing your taxes can be complicated. You don’t want to risk paying too little and getting into trouble with Uncle Sam. But leaving tax credits or deductions on the table is also a problem. (No one wants to pay more taxes than they owe.)

If you’re filing your taxes on your own, check out Bankrate’s tax resource center for tools that may help. You may also want to consider working with a tax professional if you have questions or feel overwhelmed.

Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
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