Child-Care Tax Breaks for Working Parents

Working parents may be able use their flexible spending account along with the child and dependent care credit to save on taxes when paying for child care.

Question: I used my dependent care flexible spending account at work to pay $5,000 of my children’s day-care expenses. But with two kids under age 5, our total child-care bills in 2018 were much more than that. Can I take the dependent care tax credit for our additional child-care expenses?

Answer: You won’t be able to take the child and dependent care credit for all of your extra expenses, but you may be able to use the credit for up to $1,000 of those costs.

If you have two or more kids under 13 and pay for child care while you and your spouse work or look for a job (or if one of you is a full-time student), you can claim the child-care credit for up to $6,000 in child-care expenses, including day care, preschool, a nanny or babysitter who watches your kids while you work, before- and after-school programs, and summer day camp. But if you used the maximum $5,000 from your dependent care account at work tax-free for child-care costs, that counts toward the $6,000 limit and you can count only the extra $1,000 toward the child-care credit. (The $5,000 FSA limit is per couple – even if both of your employers offer the plans – and isn’t based on the number of children you have.)

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The dependent care tax credit is worth 20% to 35% of the first $3,000 in eligible child-care expenses if you have one child, or up to $6,000 in child-care expenses if you have two or more children. The percentage is based on your income. You’ll qualify for the 35% credit if your income was $15,000 or lower in 2018. The credit gradually decreases as earnings rise, dropping to 20% of eligible expenses once income reaches $43,000 or more. So if you paid $5,000 in child-care costs from your FSA at work and still had an additional $1,000 in expenses that count toward the credit, you can cut your tax liability by $200 to $350, depending on your income.

See IRS Publication 503, Child and Dependent Care Expenses, for more information and a list of credits at each income level.

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.