Key takeaways
What this article covers, in order:
- Who is a qualifying person
- The tests you must pass
- What counts as care, and what does not
- The credit rate: 2025 versus 2026
- Dependent care FSA: the limit jumps in 2026
- Worked example: FSA or credit for a two-child household
There is no federal deduction for child care, but there is a credit. The child and dependent care credit returns a percentage of what you pay for care so that you, and your spouse if you file jointly, can work or look for work. You can count up to $3,000 of expenses for one qualifying person or $6,000 for two or more. For 2025 the credit rate runs from 35% down to 20% depending on income; starting in 2026 the top rate rises to 50%, so the most anyone can receive is $1,500 for one person or $3,000 for two or more.
The other half of the picture is the employer dependent care FSA, whose tax-free limit rises from $5,000 to $7,500 in 2026. The two interact, and for many families the choice between them is the real decision. This guide covers who qualifies, what counts, both years' numbers and a worked comparison.
Who is a qualifying person
The care must be for one of these, and the person must have lived with you for more than half the year:
- Your dependent who was under age 13 when the care was provided.
- Your spouse who was physically or mentally unable to care for themselves.
- Any dependent of any age who could not care for themselves.
A child who turns 13 during the year counts only for care before the birthday.
The tests you must pass
- Earned income: you, and your spouse if filing jointly, must have earned income. Self-employment profit counts. A spouse who is a full-time student or unable to self-care is treated as earning $250 a month with one qualifying person or $500 with two or more.
- Work-related: the care must let you work or actively look for work.
- Filing status: generally single, head of household, qualifying surviving spouse or married filing jointly. Married filing separately generally cannot claim it, with limited exceptions for spouses living apart.
- Provider identification: you report the provider's name, address and SSN or EIN on Form 2441.
- Eligible provider: not your spouse, not the child's parent, not anyone you claim as a dependent, and not your own child who is under 19 at year-end.
What counts as care, and what does not
- Counts: daycare centres, preschool, before- and after-school care for children in kindergarten and up, a nanny or babysitter, day camp (even a sports or coding camp), and agency fees to find care.
- Does not count: kindergarten or school tuition, overnight camp, summer school and tutoring, food, clothing and entertainment billed separately, and a deposit you forfeit if care never starts.
The credit rate: 2025 versus 2026
Tax year 2025
The rate is 35% if your AGI is $15,000 or less and falls by one percentage point for each band of income above that, reaching 20% for AGI over $43,000. Any household with AGI above $43,000 gets 20% for 2025, which makes the maximum $600 for one qualifying person or $1,200 for two or more.
Tax year 2026 and later
The One Big Beautiful Bill Act, which the IRS now calls the Working Families Tax Cuts, raised the top rate to 50% for tax years beginning in 2026. According to the IRS, the rate is 50% at AGI of $15,000 or less, gradually decreases to 35% as income rises above $15,000, holds there, then decreases again once AGI passes $75,000 ($150,000 for married filing jointly), never falling below 20%. The expense caps stay at $3,000 and $6,000. Middle-income families gain the most: a joint return under $150,000 of AGI that would have been at 20% in 2025 is at 35% in 2026.
The credit is nonrefundable in both years, so it can cut your tax to zero but will not create a refund.
Dependent care FSA: the limit jumps in 2026
If your employer offers a dependent care assistance program, you can set aside pre-tax pay for care. The exclusion is $5,000 per household for 2025 ($2,500 if married filing separately) and rises to $7,500 starting in 2026 ($3,750 married filing separately). FSA money avoids federal income tax and the employee's 7.65% Social Security and Medicare tax.
The interaction rule: every dollar you exclude through an FSA reduces the $3,000 or $6,000 expense cap for the credit. You cannot use the same expense for both. In 2026, a household that excludes the full $7,500 has no credit room left, because $7,500 is more than the $6,000 cap.
Worked example: FSA or credit for a two-child household
Marisol runs a mobile pet-grooming business in Tucson as a single-member LLC. Her husband Dev is a salaried hospital technician whose employer offers a dependent care FSA. Their children are 3 and 6. They pay $14,000 a year for daycare and after-school care. Their AGI before any FSA is $148,000, which keeps them in the 22% federal bracket under the 2025 and 2026 joint tables even after an FSA. The figures below ignore state tax.
2025
- Credit only: AGI over $43,000 means 20%. $6,000 × 20% = $1,200.
- FSA of $5,000 plus credit: FSA saving is $5,000 × (22% + 7.65%) = $1,482.50. The credit cap drops to $6,000 − $5,000 = $1,000, and $1,000 × 20% = $200. Total $1,682.50.
2026
- Credit only: AGI of $148,000 is under the $150,000 joint threshold, so the rate is 35%. $6,000 × 35% = $2,100.
- FSA of $7,500: saving is $7,500 × 29.65% = $2,223.75. The credit cap becomes $6,000 − $7,500, which is below zero, so no credit. Total $2,223.75.
- FSA of $5,000 plus credit: $1,482.50 plus $1,000 × 35% = $350, a total of $1,832.50.
In this case the full $7,500 FSA still wins in 2026, but only by about $124. A family in the 12% bracket, or one whose AGI is low enough for a higher credit rate, may do better skipping the FSA. Run both before open enrollment, since FSA elections are usually locked for the plan year. Also note the FSA exclusion, like the credit, is limited to the earned income of the lower-earning spouse.
Common mistakes
- Deducting child care as a business expense. Marisol cannot put daycare on Schedule C. It is a personal cost, even though it lets her work.
- Forgetting the provider's tax ID. Ask for a Form W-10 or the provider's SSN or EIN when care starts, not in April.
- Ignoring nanny employment taxes. A nanny who works in your home is usually your household employee, which can mean Schedule H and an EIN.
- Counting the same dollars twice. Form 2441 Part III subtracts FSA benefits first.
- Including private school tuition for kindergarten or above. Only before- and after-school care qualifies at that level.
hellobooks< / a > -helps">How HelloBooks helps
If you are self-employed, HelloBooks helps keep personal care costs out of your business books while still keeping the evidence. Bank rules and AI categorisation flag daycare payments from a business account so you can record them as owner's draws, and receipt OCR captures provider invoices with the provider's name and amount. If your business has employees and you want to offer a dependent care FSA, payroll runs in the sister product HelloTime, which syncs payroll entries into HelloBooks so the benefit shows up correctly in your general ledger. You or your CPA still complete Form 2441.
This is general information as of November 2026, not tax or legal advice. For your own situation, check IRS Publication 503 and the Form 2441 instructions or speak with a qualified CPA.
