Child-Care Tax Breaks for Working Parents

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.)

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.