Paid for Child Care in 2023? Here's One Tax Credit You Don't Want to Miss

If it seems like the cost of child care keeps rising, well, that's probably because it is. Care.com puts the average weekly cost of daycare in 2023 at $321 for an infant and $293 for a toddler. Both figures represent an uptick from 2022.

What this also means is that if you have a toddler who goes to daycare 50 weeks out of the year, you might be spending an average of $16,050 on annual care. Ouch.

Now, consider this. In Q3 2023, median weekly earnings across U.S. workers was $1,145. For 50 weeks of work per year, that's $57,250. If you earn $57,250 a year and spend $16,050 on daycare, it means child care is eating up a whopping 28% of your income. Double ouch.

The good news, though, is that you may be able to enjoy some tax savings if you pay for child care. You just need to claim one specific credit when you file your taxes.

Are you eligible for the Child and Dependent Care Credit?

In the world of taxes, there are deductions and credits. And they're not the same thing.

A tax credit is a dollar-for-dollar reduction of your tax liability. If you owe the IRS $1,000 but claim a $1,000 tax credit, your bill gets wiped out so you owe nothing.

A tax deduction exempts some of your income from taxes. A $1,000 tax deduction won't be worth $1,000 in tax savings. Rather, it will be worth a portion of that $1,000, depending on your tax bracket.

With that in mind, if you paid for child care for a dependent under age 13 in 2023, you may be eligible for the Child and Dependent Care Credit. The credit lets you claim a portion of up to $3,000 in child care expenses for a single qualifying child, or a portion of up to $6,000 in child care expenses for two children or more.

The percentage of your costs you're allowed to claim will hinge on your income. If you earn $15,000 or less, you can claim up to 35% of your costs. That percentage then gradually drops to 20% for those with an income of over $43,000.

Here's how the Child and Dependent Care Credit might work in theory. Let's say you earned $57,250 and paid $16,050 in daycare expenses in 2023 for a single child under age 13. You can claim 20% of $3,000, or $600 as a credit. If you owe the IRS $1,000, the Child and Dependent Care Credit will reduce your tax liability to $400.

A limited benefit for parents

The Child and Dependent Care Credit can result in some nice savings on your taxes. But let's also be real. Due to the way the credit is calculated, many parents won't be able to recoup anywhere close to the total amount they're spending on child care.

And if you're wondering how to eke out more savings on child care, well, unfortunately, you may have limited options. You could try shopping around for a new daycare center. But given that many of these facilities have extensive waitlists, that's often easier said than done.

You could also look at licensed in-home daycares and see if they're less expensive than corporate daycare centers in your area. But in some cases, that won't actually save you money -- it may just provide a different sort of atmosphere for your child.

As such, your best bet may be to focus on all of the tax savings you can get as a parent. In addition to the Child and Dependent Care Credit, the Child Tax Credit could put up to $2,000 per child under age 17 back in your pocket. So those two credits combined could be a financial lifeline if you feel like you're drowning in child care costs.