Daycare is tax deductible through two federal programs, but only if you paid for it so you could work
You can reduce your federal income tax by claiming daycare expenses through the Child and Dependent Care Credit or by using a Dependent Care FSA (Flexible Spending Account). Both let you set aside or deduct money you spent on daycare, preschool, after-school care, or summer camp — but only the costs that let you work or look for work. If you paid for daycare while you were not working, those costs do not count.
The two programs work differently. The credit reduces your tax bill directly. The FSA lets you pay for daycare with pre-tax dollars through your employer, which lowers your taxable income. You can use one or the other, not both, for the same child in the same year.
Key Takeaways
- The Child and Dependent Care Credit covers up to $3,000 in daycare costs per child per year and reduces your tax bill by 20 to 35 percent of that amount, depending on your income.
- A Dependent Care FSA lets you set aside up to $5,000 per year in pre-tax money through your employer to pay daycare bills, but you must use the money or lose it by the end of the year.
- You must have earned income (wages, salary, or self-employment income) in the year you claim the deduction — stay-at-home parents cannot use either program.
- Daycare must be for a child under age 13, or for a spouse or parent you care for who cannot care for themselves, and you must provide more than half their financial support.
- You will need the daycare provider's name, address, and tax ID number (or Social Security number) to claim either benefit on your tax return.
Child and Dependent Care Credit: How much you get back
The Child and Dependent Care Credit is a direct reduction in the tax you owe. You claim it on Form 2441 when you file your federal return. The credit covers up to $3,000 in daycare costs per child per year. The amount of tax you get back depends on your adjusted gross income (AGI).
If your AGI is $15,000 or less, the credit is worth 35 percent of your daycare costs — so $3,000 in costs would reduce your tax by $1,050. For every $2,000 your AGI rises above $15,000, the credit percentage drops by 1 percent, down to a minimum of 20 percent. If your AGI is $43,000 or more, the credit is 20 percent of your costs — so $3,000 in costs would reduce your tax by $600.
You do not have to itemize deductions to claim this credit. It works whether you take the standard deduction or itemize. The credit is non-refundable, meaning it can reduce your tax to zero but cannot create a refund if the credit is larger than the tax you owe.
Dependent Care FSA: Using pre-tax payroll deductions
A Dependent Care FSA is an account you set up through your employer's benefits plan. You tell your employer how much to deduct from your paycheck before taxes are taken out — up to $5,000 per year — and that money goes into the account. You then use it to pay daycare bills. Because the money was never taxed, you save on federal income tax, Social Security tax, and Medicare tax.
The FSA has a strict rule: you must spend the money by December 31 of the year it was set aside, or you lose it. Some employers offer a "grace period" of up to 2.5 months into the next year, but not all do. If you are unsure whether your employer offers one, ask your benefits administrator before you enroll.
You can set aside up to $5,000 per year, which is higher than the $3,000 limit for the credit. However, if you use the FSA, you cannot also claim the Child and Dependent Care Credit for the same child in the same year. You have to choose which one saves you more money.
What daycare costs count
Both programs cover daycare, preschool, after-school programs, summer day camps, and in-home nannies or babysitters. They also cover adult day care for a spouse or parent you support who cannot care for themselves. The daycare must be for a child under age 13, or for a dependent of any age who is physically or mentally unable to care for themselves.
Costs that do not count include overnight camps, school tuition (even if the school provides before- or after-school care), transportation to daycare, food, clothing, or entertainment. If a daycare center charges one bill that includes meals, ask them to break out the daycare portion — only that portion counts.
You must have paid the daycare provider so that you could work or look for work. If you were not employed or actively job-hunting during the time you paid for daycare, those costs do not count, even if your spouse was working.
Income limits and who can claim
There is no income limit to claim the Child and Dependent Care Credit, but your credit amount shrinks as your income rises. The FSA has no income limit either.
You must have earned income in the year you claim the deduction. Earned income means wages, salary, tips, or self-employment income. It does not include investment income, Social Security, unemployment benefits, or child support. If you are married and file jointly, both spouses must have earned income, or the amount you can claim is limited to the lower-earning spouse's income.
If you are single, divorced, or widowed, you can claim the credit or FSA as long as you had earned income. If you are married, you can file jointly or separately — but if you file separately, neither spouse can claim the credit.
What documents you need
To claim the Child and Dependent Care Credit on your tax return, you will need the daycare provider's name, address, and either their Employer Identification Number (EIN) or Social Security number. If the provider is a daycare center, they have an EIN. If it is an individual nanny or in-home provider, ask for their Social Security number or EIN.
Keep receipts or invoices showing what you paid and when. If you paid by check or credit card, your bank or card statement is proof. If you paid cash, a receipt from the provider is important. You do not send these documents to the IRS, but you must have them if the IRS asks.
For a Dependent Care FSA, your employer will send you a statement showing how much you set aside and how much you spent. Keep receipts from the daycare provider showing what you paid. Again, you do not send receipts to the IRS unless asked, but you must have them.
Comparing the credit and the FSA
| Feature | Child and Dependent Care Credit | Dependent Care FSA |
|---|---|---|
| Maximum annual cost covered | $3,000 per child | $5,000 per household |
| Tax savings at lower income | 35% of costs (if AGI ≤ $15,000) | 15.3% of costs (federal + FICA taxes) |
| Tax savings at higher income | 20% of costs (if AGI ≥ $43,000) | 15.3% of costs (federal + FICA taxes) |
| Use it or lose it? | No — unused credit carries to next year in some cases | Yes — must spend by Dec 31 or lose it |
| Can you use both? | No — pick one per child per year | No — pick one per child per year |
| Requires employer plan? | No | Yes |
For most people, the credit is simpler because you claim it when you file your taxes and there is no risk of losing money. The FSA saves more money if your employer offers it and you are confident you will spend all the money by year-end. If you have two or more children and high daycare costs, the FSA's $5,000 limit may let you cover more expenses than the credit's $3,000 per-child cap.
To decide which works better for you, calculate the tax savings from each. Multiply your daycare costs by the credit percentage based on your income, then compare that to the tax rate you pay (federal plus Social Security and Medicare). The one that produces the larger number is the better choice for your situation.
Frequently Asked Questions
Can I claim daycare costs if I am self-employed?
Yes. Self-employment income counts as earned income. You can claim the Child and Dependent Care Credit on your tax return, or if you have employees and offer a Dependent Care FSA as a benefit, you can set one up. You will need the daycare provider's tax ID number to claim the credit.
What if my daycare provider will not give me their tax ID number?
Ask for either their Employer Identification Number (EIN) or Social Security number. If they refuse, you can still claim the credit using their name and address, though the IRS may ask for the ID number later. Many individual providers are reluctant to share their SSN for privacy reasons — offering to use their EIN instead may help.
Can I claim daycare costs for my grandchild if I am paying for it?
Only if you provide more than half the grandchild's financial support for the year and claim them as a dependent on your tax return. If the child's parent claims them as a dependent, you cannot also claim the daycare costs.
What happens if I do not spend all the money in my FSA by the end of the year?
You lose it. Some employers offer a grace period of up to 2.5 months into the next year, but this is optional. Check your plan documents or ask your benefits administrator. If your plan does not have a grace period, you forfeit any unused balance on December 31.
Can I claim daycare costs if I am in school full-time?
Only if you also have earned income. Time spent in school does not count as earned income, even if you are a full-time student. If you work part-time and pay for daycare so you can attend classes and work, you can claim only the daycare costs related to the time you were working or looking for work.