The US tax code provides a small assistance for childcare and dependent care. There is a tax credit available to all and a pre-tax payment offered by some employers. The following will explain how to determine which is best for your situation.

Let’s first discuss who qualifies. The recipient of the care must be a child under 13 years old or a person who is physically or mentally incapable of caring for themselves. For a taxpayer to get the tax credit or deduction, the child or person receiving the care must be a dependent of the taxpayer or the spouse of the taxpayer who lives in the same house for at least half the year. The rules about claiming dependency would consume this blog. For this discussion, let’s just summarize and say the recipient should be one who lives with you more than half of the year and for whom you pay most of their living expenses.

The expenses that can be claimed are day care, summer day camps (not overnight camps), before and after school care, and pre-school. Payments for private grade schools are not allowed for this credit or deduction.

To receive either tax benefit, both the taxpayer and the taxpayer’s spouse (if married) must be employed, self-employed, or in school full-time. If the spouse is the one receiving care, then the spouse is not expected to be employed or in school. Essentially, the tax benefit is to provide for care while the taxpayer(s) is earning income (or going to school). There are special rules for married filing separately which are too complicated for this blog.

A credit is a direct reduction of taxes while the pre-tax payment, like a deduction, is a reduction of taxable income. Assume a married couple has $100,000 of wages — $60,000 for one spouse and $40,000 for the other. After the standard deduction of $30,000, their taxable income is $70,000. Their taxes would be $7,923. If they received a $1,000 credit, their taxes would be $6,923. If they received $1,000 of pre-tax benefit (like a deduction), then their taxable income would be $69,000 and their taxes would be $7,803.

First, let’s discuss the tax credit. This allows up to $3,000 of child care expenses for one child or $6,000 for two to be claimed for a credit. The credit is then calculated as a percentage of the child care expenses. The percent is 20-35% depending on income. Since 20% is for adjusted gross incomes (AGI) of $43,000 or higher, let’s just use 20%. With the high cost of child care, most people pay more than $3,000 per child during the year.  Therefore, this credit is usually $600 for one child or $1,200 for the second.

The second option is a payroll deduction through a dependent care Flexible Spending Account (FSA). There is also an FSA for health care but that is not part of this discussion. The dependent care FSA allows an employee to have up to $5,000 set aside pre-tax for child care, regardless of the number of children. Using the example from earlier, the income on the tax return would drop from $100,000 to $95,000 and the taxable income would drop to $65,000. Not all employers provide this option. Notice that the maximum for the credit is based on $6,000. If the taxpayer has two children, they can use the FSA for $5,000 and the extra $1,000 through the credit.

If your employer provides this option, should you take it? That depends. The most benefit you can get via the credit (assuming the 20%) is $600 for one child and $1,200 for two children. The most you can get from the FSA depends on your tax bracket. If your tax bracket is less than 20%, then the 20% from the credit is better.  If your tax bracket is higher and you have one child, the FSA is best. For two children, there is a small range where the tax credit remains the better option. The following shows suggestions based on 2025 numbers and assuming the standard deduction:

Filing Status            AGI        # of children    FSA or Tax Credit    Max tax benefit*

Head of Household    < $87,350    1                Tax Credit                $600

Head of Household    > $87,350    1                FSA                        $1,850

Head of Household    <$91,350     2                Tax Credit                $1,200

Head of Household    >$91, 350    2                FSA                        $2,050

Married Filing Jointly  <$126,950    1                Tax Credit                $600

Married Filing Jointly  >$126,950    1                FSA                        $1,850

Married Filing Jointly  <$130,950    2                Tax Credit                $1,200

Married Filing Jointly  >$130,950    2                FSA                        $2,050

* Max benefit for FSA shows the 37% tax bracket. Most people will be lower but better than tax credit.