What Tax Effects Does The Child Care Tax Credit Have?

The Child Tax Credit is a federal support program for Americans raising children, which can lower their tax bill by up to $2,000 per qualifying child under age 17. This credit is calculated based on income and a percentage of expenses incurred for the care of eligible children and other dependents. It is a tax break for working people with qualifying dependents and can help offset the costs of childcare.

A temporary change in the American Rescue Plan allows parents or guardians to claim a maximum credit of $4,000 (50 of $8,000 in expenses) for one child and $8,000 for two or more children. The Child and Dependent Care Credit is currently 20 to 35 of qualified expenses, with the percentage depending on adjusted gross income (AGI).

For the 2022-2023 tax year, taxpayers can claim the credit on their tax return if they paid someone to care for their child in 2020. This credit “gives back” a portion of the money spent on care, potentially reducing their tax bill by hundreds or even thousands of dollars. Higher-income families generally benefit more from the exclusion than from the credit because the excluded income is free from both income and payroll taxes.

The Child and Dependent Care Credit is nonrefundable, meaning that any taxes owed will be decreased by the credit amount, but taxpayers will still have to pay the full amount. In general, taxpayers can exclude up to $5,000 for dependent care benefits received from their employer. The expenses claimed may not exceed $5,000.

There are no tax deductions available for child care for individuals, but some might qualify for other credits or deductions. The Child and Dependent Care Credit is a federal tax benefit that helps families pay expenses for child care needed to work or look for work.