Federal Child and Dependent Care Tax Credit

The federal child and dependent care tax credit reduces the amount of taxes working families with child care expenses are required to pay. It is the second largest source of federal child care assistance, and families at all income levels are eligible for the credit.

However, since the credit is nonrefundable, its value to low-income families is limited. The credit cannot exceed what a family owes in taxes, and no benefit is provided to families whose incomes are so low that they don’t pay taxes. (The federal income tax threshold for a single-parent family of three with two children is about $15,000 per year.)

To be eligible, a family must incur expenses for the care of a child under the age of 13 (or of an older dependent who is unable to care for him or herself) in order to work or look for work. In 2006, families with two or more children can claim up to $6,000 in annual child care expenses, and families with one child can claim up to $3,000. The credit equals 20 to 35 percent of the amount claimed, depending on family income, so for example, the maximum credit is $2,100 for families with two or more children.

Many states have built on the federal child and dependent care tax credit and offer state credits (or in some cases, tax deductions) to offset state income tax liability.