TOPLINES: Child Care in the 2025 Tax Reconciliation Package

Let’s say you have two children under 17 years old living with you year-round. You and your spouse also moved in your mother-in-law eight months ago and hired a memory care assistant to stay with her so you and your spouse could work full time. If you’ve got kiddos at home, you’ve probably discovered that paying for childcare is no joke! The same can be said of hiring in-home help for a disabled or elderly family member. However, above $125,000, the credit decreases as your AGI increases.

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• If the person isn’t your dependent due to certain exceptions (e.g., they earned more than $5,050 in 2024, more than $5,200 in 2025, or filed a joint return), you might still qualify.
• However, above $125,000, the credit decreases as your AGI increases.
• In New Mexico, eligible households may be able to offset some childcare costs through the state’s refundable Child Day Care Credit.
• There are a lot of ways children impact your tax returns, from deductions to childcare credits.
• It’s a helpful tax credit for many families any year but it may benefit families dealing with reduced salaries from the coronavirus pandemic.

However, you may qualify for the Credit for Other Dependents if they meet the requirements. Parents and guardians with higher incomes may be eligible to claim a partial credit. You must have paid for care for your dependent so you (and your spouse if married) could work or look for work.

Child and Dependent Care Tax Credit

The District of Columbia offers two versions of the state child and dependent care tax credit. The child also cannot file a joint tax return unless they file it to claim a refund of withheld income taxes or estimated taxes paid. You still qualify for the credit if you have earned income from self-employment. Just make sure you track your income and dependent care expenses carefully.

Qualifying Dependent Criteria

Your employer will also include in your wages shown in box 1 of your Form W-2 any dependent care benefits that exceed the maximum amount of dependent care benefits allowed to be excluded. The maximum amount is $5,000 ($2,500 if married filing separately). If you qualify for the CTC but don’t receive the full amount because your tax liability is less than the credit, you may be eligible for the refundable ACTC.

How to claim the dependent care tax credit

If you receive any dependent care benefits, you may be able to exclude these benefits from your income when calculating the CDCC. Earned income is usually money that you earn through work or business activities. One thing that’s easy to overlook is getting a tax identification number of the organization or person who provided the care. This can be either the employer identification number (EIN) or Social Security number (SSN) of the organization or person providing the care. The cost of private school tuition for kindergarten and higher grades does not qualify, as it is primarily educational. Expenses for overnight camps, summer school, or tutoring programs are also not considered qualifying care expenses.

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Check IRS Publication 503 for the full list of qualifying situations. These limits mean higher-income families will still qualify to claim the credit, just for a smaller percentage of their care costs. Payments for nursery school, preschool, or any similar programs for kids below the level of kindergarten qualify as “care” expenses! So does before- or after-school care for children in kindergarten or a higher grade.

• The Child and Dependent Care Credit is worth as much as 35% of your qualified expenses, up to $3,000, (for one qualifying person), and $6,000 (for two or more qualifying persons).
• In cases of divorced or separated parents, the custodial parent is the one who can claim the credit, even if the noncustodial parent is entitled to claim the child as a dependent.
• If you are married, both you and your spouse must file a joint return to claim the credit.
• Always consult IRS resources or a tax professional if you’re unsure about your eligibility or need personalized guidance.

Can I claim both the Child Tax Credit and the Earned Income Tax Credit (EITC)?

Most tax preparation software automatically child and dependent care credit calculates dependent-related benefits and credits. You may qualify for the Credit for Other Dependents (ODC) for a child or dependent who is not a “qualifying child” for purposes of the Child Tax Credit. The tool is designed for taxpayers who were U.S. citizens or resident aliens for the entire tax year for which they’re inquiring. If married, the spouse must also have been a U.S. citizen or resident alien for the entire tax year. For information about nonresidents or dual-status aliens, please see International taxpayers.

Self-Employment Tax Deductions

In other cases, you can only claim the credit for the care provided during the year that you were in the military. The rules for determining which years you can claim the credit are explained in the instructions to Form 2441. The Child and Dependent Care Credit is complicated, and it can confuse a lot of taxpayers. “These credits can become complicated, and taxpayers should seek the guidance of tax professionals to avoid errors and potential assessments of penalties,” Caruso advises.

For married couples filing jointly, the expenses are limited to the lesser of your earned income or your spouse’s earned income. The caregiver must have an adjusted gross income below $50,000 or $100,000 (for married filing jointly). The care hired or given must be deemed necessary to care for the dependent, spouse, parent, or relative by blood or marriage. Additionally, you were not reimbursed or compensated for the amount of child day care expenses incurred and cannot be claimed as a dependent by another taxpayer for the year.

This is different from a tax deduction, which can reduce how much of your income you are taxed on. It may lower your tax rate, resulting in you paying less tax, but a tax credit is a dollar-for-dollar reduction of the taxes you have to pay. Generally, taxpayers and their spouses who are filing jointly must have some earned income during the 2021 tax year and paid expenses for child care for either parent to work or look for a job. Although this change is new, the child and dependent care credit isn’t. The credit was first established in 1976 to help reduce the financial burden of paying for child care. It’s a helpful tax credit for many families any year but it may benefit families dealing with reduced salaries from the coronavirus pandemic.