Claiming the Child-Care Tax Credit

You may be able to take advantage of this tax break even if you contribute to and use money from a dependent-care flexible-spending account.

I used my dependent-care flexible-spending account at work to pay for my two daughters’ daycare expenses in 2011. But I still had way more expenses beyond what I had in my FSA. Can I take the child-care tax credit for any of the extra expenses?

Yes. Because you have two kids and had more than $5,000 in child-care costs, you can claim a portion of the tax credit even though you have already used pretax money from your FSA for their care.

Here’s how the two tax breaks play out: With a dependent-care flexible-spending account, you can set aside up to $5,000 in pretax money to pay for care for your children under age 13 while you work. With the child-care tax credit, you can claim up to $3,000 of expenses for one child under 13 and up to $6,000 for two or more kids. You can’t use the same expenses to get both tax breaks. It’s usually more valuable to use the FSA for child care than it is to take the tax credit because money in the FSA escapes Social Security and Medicare taxes as well as income tax (see FSA or Child-Care Credit? for details). Also see IRS Publication 503 Child and Dependent Care Expenses (opens in new tab),

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If you pay for care for two or more kids under age 13, you can max out your FSA and still claim the tax credit for up to an extra $1,000 in expenses, which would cut your tax bill by at least $200. If you have just one child and you’ve maxed out your FSA, you aren’t eligible for the credit because the limit is $3,000 in total expenses; you can’t use any excess expenses toward the credit.

Families who earn less than $15,000 can claim a tax credit for 35% of their child-care expenses; families who earn more than $43,000 get the smallest credit, worth 20% of their eligible expenses. This is a tax credit, not a deduction, so it lowers your tax bill dollar for dollar.

Expenses that qualify for both the spending account and the credit include the cost of daycare, a nanny or babysitter, preschool, before-school or after-school care, and even the cost of summer day camp for children under age 13, if you spend the money on care so you can work or look for work. If you’re married, both you and your spouse must have a job (or be looking for work) or be a full-time student to qualify. To claim the credit, file Form 2441 with your federal tax return. For more information about the child-care credit, see FAQs on the Child-Care Tax Credit.

For more tax information for this year’s filing season, see 7 Tips for Filing Your 2011 Taxes.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.