Is Daycare Tax Deductible? What You Should Know
September, 18 2025 by Anne Davis, EA
Generally, a priority for parents is the welfare and care of their children. And when you finally find just the right daycare or person to look after and nurture your child, you hope you can manage the cost. For many, the cost of daycare centers and similar childcare options can take a toll on a family’s budget. So, are my daycare expenses tax-deductible? While for most folks, daycare expenses do not reduce their income, these expenses do have the potential to reduce their tax due if they qualify. Fortunately, Uncle Sam has seen fit to give a tax break, in the form of a tax credit, to assist with the cost of childcare, if specific criteria are met. This tax credit is appropriately called the Child and Dependent Care Expenses. A tax credit will reduce your total tax, dollar for dollar. For example, if your tax is $1,000, and you have a tax credit of $100, your total tax is now $900.
To claim the tax credit, five tests must be met: (1) Qualifying Person Test; (2) Earned Income Test; (3) Work-Related Expense Test; (4) Joint Return Test; and (5) Provider Identification Test. We will now discuss each test.
Qualifying Person Test
The person for whom care expenses are paid must be (1) Your child who is under 13 years of age, who is claimed as your dependent on your tax return, and who lives with you for more than half the year; or (2) Your spouse who is not physically or mentally able to care for themselves, and lives with you for more than half the year; or (3) a person who lives with you for more than half the year, is physically or mentally not able to care for themselves, and is your dependent. The qualifying person must have a Social Security number (SSN) or an individual taxpayer identification number (ITIN).
If you cannot claim your child as your dependent, due to a divorce or legal separation decree, you can still claim the credit if your child received more than half of his/her support from one or both parents, and you were the custodial parent. You are considered the custodial parent if your child spends the greatest number of nights with you during the calendar year. If your child spent an equal number of nights with both parents, you are considered the custodial parent if your adjusted gross income is higher.
A person is considered physically and/or mentally unable to care for themselves if they cannot dress, clean, or feed themselves due to their disabilities. Also, a person who requires constant supervision to prevent them from harming themselves or others is considered unable to care for themselves.
Earned Income Test
Uncle Sam is willing to assist you with the cost of child and/or dependent care expenses, only if these expenses are incurred so that you and/or your spouse can work or look for work. Hence, the “earned income test.”
The earned income test requires that you and your spouse (if you are filing jointly) have earned income. Examples of earned income are wages, salaries, tips, other taxable employee compensation, strike benefits, disability pay reported as wages, and net earnings from self-employment. A net loss from self-employment will reduce your earned income. Also, you can elect to include nontaxable combat pay as earned income when calculating the credit.
Income that is not considered earned income includes, but is not limited to, pension and annuities, Social Security benefits, workers’ compensation, interest and dividend income, child support payments, and scholarship or fellowship grants not reported on a W-2, Wage and Tax Statement.
If your spouse is non-working and is a full-time student or is unable to care for themselves due to physical and/or mental disabilities, they are treated as having earned income for any month during which they are a full-time student or are unable to care for themselves. If in any given month, both you and your spouse did not work and are full-time students, or not physically or mentally able to care for yourselves, only one of you can be treated as having earned income.
Work-Related Expenses Test
As was mentioned earlier, the purpose of this tax credit is to assist working taxpayers with the cost of child and dependent care expenses. Therefore, two criteria have to be met to satisfy this test. One, the expenses are incurred so that you, and/or your spouse, if you are filing jointly, can work or look for work. If you do not find a job and have no earned income by the end of the year, you cannot take the credit. Two, the expenses must be for the care of a qualifying person, as defined earlier.
Volunteer work that is unpaid, or paid minimally, is not considered work.
If you work or are looking for work for only part of the year, you must prorate your expenses for the purpose of calculating the credit, so that the expenses cover only the time when you were working or looking for work. For example, if you paid $100 a month for childcare and worked the entire year, $1,200 is considered a work-related expense for the purpose of the tax credit. However, if you worked for only 4 ½ months, $450 is considered a work-related expense.
Uncle Sam is specific as to what constitutes work-related expenses for the purpose of the child and dependent care tax credit. The expense only qualifies if its main purpose is for the care of your child, dependent, or spouse who is physically and/or mentally incapable of caring for themselves. Therefore, in general, expenses such as food, lodging, clothing, education, and entertainment do not qualify. There is an exception to the cost of education. The cost for nursery school, preschool, or similar programs for children below the level of kindergarten qualifies as expenses for care. The cost for before and after school care for children in kindergarten or higher also qualifies as a childcare expense for the purpose of the tax credit.
It is worth mentioning that payments made to relatives who watch your child may qualify as long as that relative is (1) not someone you can claim as a dependent on your tax return; (2) not your child who is under the age of 19 as of the end of the year; (3) not someone who is your spouse during anytime of the year; or (4) not the parent of your qualifying child who is being cared for.
Joint Return Test
If you are married, you generally must file jointly to take the credit. There are two exceptions to that rule: (1) you are legally separated, and qualify to file as head of household; (2) you are legally married but you live apart AND (a) are not filing with your spouse; (b) the qualifying child or dependent lives in your home for more than half of the year; (c) you pay for more than half the cost of keeping up your home; AND; (d) your spouse does not live in your home for the last 6 months of the year.
Of course, if you are single or a surviving spouse and meet the test in this article, you generally will be able to qualify for the credit.
Provider Identification Test
All people and organizations providing care must be identified on your tax return. You must report the name, address, and the taxpayer identification number of the care provider. If the caregiver is an individual, you must provide their Social Security number (SSN). If the caregiver is an individual working for an organization, you must provide the employer identification number (EIN). You can request that the care provider complete Form W-10, Dependent Care Provider’s Identification and Certification. You should also ask for the individual’s and/or business phone number.
But what if the care provider refuses or provides incorrect information? It will be your responsibility to show due diligence by (1) maintaining a copy of Form W-10 or other documents used to obtain the required information, OR (2) if the provider refuses to provide the information, you must attach a statement to your tax return stating that you requested the information, but the provider did not provide it. Your statement must include your name and your Social Security number.
How Much is the Credit
For taxable years 2024 and 2025, the credit is between 20% to 35% of $3,000 (for one dependent) or 20% to 35% of $6,000 (for two or more dependents). The applicable percentage is based on your Adjusted Gross Income (AGI). AGI represents your total income minus specific deductions, such as alimony, deductible IRA contributions, and student loan interest. If your AGI is over zero but not over $15,000, the applicable percentage is 35%, meaning that your tax credit is $1,050 ($3,000 × 35%) if you have one dependent, or $2,100 ($6,000 × 35%) if you have two or more dependents. The applicable percentage will be 20% when your AGI is $43,000 and above. The applicable percentage decreases as your AGI gets closer to $43,000. Tax software is designed to apply the correct percentage. Form 2441, Child and Dependent Care Expenses, will be used to report the credit to the Internal Revenue Service (IRS).
Other factors come into play when figuring out the tax credit amount, such as employer reimbursement under a dependent care assistant program, non-taxable amounts received by the state to assist with dependent care costs, and more. For a detailed discussion, please review IRS Publication 503, Child and Dependent Care Expenses.
Big Beautiful Bill – Update
As we know, tax law is dynamic, and the credit for Child and Dependent Care Expenses is not immune. On July 4, 2025, the One Big Beautiful Bill Act of 2025 was signed into law, making the following enhancements to this tax credit effective for taxable years beginning after December 31, 2025. (In other words, the changes will come into effect on January 1, 2026, for most taxpayers.)
The following is a list of the enhancements made:
- The maximum applicable percentage increases from 35% to 50%.
- The income thresholds at which the applicable percentages begin to reduce are higher. For single filers with an AGI over $75,000 and for joint filers with an AGI over $175,000, the applicable percentage will decrease to 20%, but not below 20%.
- The Dependent Care Assistance Program’s exclusion of income limit increased to $7,500 ($3,750 for married filing separately). We did not discuss this program in the body of our discussion. This program is offered by some employers, who will assist with the cost of dependent care. This assistance is non-taxable if it is used for qualified dependent care expenses. This change is effective after December 31, 2025. The maximum that could be treated as non-taxable prior to the One Big Beautiful Bill Act was $5,000 ($2,500 if filing married separately).
Summary
In summary, Uncle Sam has a provision in place to assist with the cost of caring for qualified dependents. In view of that, I would like to provide some suggestions that will protect you in the event of an audit, as this credit is a common red flag we see in audits.
I recommend the following:
- Keep detailed records of who, when, and how much you pay your care provider. In other words, you should maintain receipts with this information. If you use an organization, they will usually provide a year-end statement. If you use an individual or a relative, it is very important that you keep a log of each day, time, and amount paid for each service in addition to a receipt.
- Do not pay your daycare provider with cash. You need a paper trail to prove the payments you made. You can use cash apps that are tied to your bank account. If you do not want to use cash apps, you can get a money order from the bank or use a personal check. I have seen many taxpayers lose the credit because payment could not be proven.
- Make sure you obtain the care-provider identification information, including phone number, as discussed earlier. Remember to keep a copy of the signed and dated Form W-10!
- Keep all of the above information for at least four years. If you also received a child or dependent care credit from the state you live in, you should consider keeping the records longer.
Please remember that if you are audited, TaxAudit is here to assist you. We have been helping taxpayers solve tax audits for more than thirty years. If you would like more information on our services, please click here or contact our customer service department at 800.922.8348 and they will be happy to help!
