Is Childcare Tax Deductible?

By Alia Nikolakopulos
happy baby image by Galina Barskaya from Fotolia.com

The Internal Revenue Service offers a nonrefundable tax credit for eligible child care expenses. A nonrefundable credit helps reduce taxable income, but not below zero--meaning that you can only use your credit up to an amount equal to your tax. Some--but not all--states also offer child care tax credits, so check the tax credits for your resident state as well.

Qualifying Child

A qualifying child for this credit must also qualify to be your dependent for the tax year in which you're claiming the credit. Generally, the child must live with you and be under the age of 13. The child does not need to be your biological son or daughter -- you can claim the credit for a qualifying relative, step or foster child if all other tests are met.

Qualifying Expenses

You have qualifying expenses if you pay for care services of a qualifying child so you can work. Child care expenses incurred so you can look for work also qualify; however, you can't take the credit if you don't have earned income during the year. Expenses can be paid to a child care facility, or to a person who provides child care services in your home. Only expenses that directly relate to child care qualify. You can't deduct school tuition for children above pre-school level.

Filing Status

You must have a filing status of single, head of household or married filing jointly to claim this credit. In most cases you are ineligible for this credit if your filing status is married filing separately. Exceptions to this rule are allowed if you are legally separated from your spouse, live apart from your spouse for the last six months of the year, or are otherwise considered unmarried.

Claiming the Credit

You are allowed to claim $3,000 in eligible expenses for each qualifying child per year; however, if you claim credit for multiple children and one child has less than $3,000 in expenses, you can allocate the remainder to another child. Your credit equals a percentage of the expenses based on your earned income for the year. To claim the credit, you'll need to complete IRS Form 2441, Child and Dependent Care Expenses, and attach the form to your 1040 income tax return.