Preschool costs may reduce your federal income tax through the Child and Dependent Care Credit or a Dependent Care FSA, but only if the care lets you work or look for work

The IRS allows you to deduct some preschool and childcare expenses, but not all preschool qualifies. The key rule: the care must enable you or your spouse to work, go to school, or look for a job. Preschool that happens while you are already at work counts. Preschool you pay for so you can take a vacation does not.

You have two main tax routes: the Child and Dependent Care Credit on your federal return, or a Dependent Care Flexible Spending Account (FSA) through your employer. You cannot use both for the same expenses in the same year. The credit and the FSA have different income limits, different maximum amounts, and different rules about what counts, so the better choice depends on your situation.

Key Takeaways

  • Only preschool and childcare that allows you to work, attend school, or search for employment counts toward a tax deduction or credit.
  • The Child and Dependent Care Credit reduces your federal tax bill by up to 20 to 35 percent of may have access to expenses, with a maximum of $3,000 in expenses per year for one child.
  • A Dependent Care FSA lets you set aside pre-tax money through your employer, up to $5,000 per year, but you lose any money you do not use by year-end.
  • You must have a Social Security number or Individual Taxpayer Identification Number for each child you claim, and you need the name and tax ID of the preschool or care provider.
  • Summer camps, overnight care, and school tuition for kindergarten and above do not count, but before-school and after-school care for school-age children does.

The Child and Dependent Care Credit: How much you can reduce your taxes

The Child and Dependent Care Credit is a dollar-for-dollar reduction in the federal income tax you owe. You claim it on Form 2441 and attach it to your Form 1040. The credit covers up to $3,000 in expenses per year for one child under age 13, or up to $6,000 for two or more children. The percentage of those expenses you can claim back ranges from 20 to 35 percent, depending on your adjusted gross income (AGI).

The higher your income, the lower the percentage. If your AGI is $15,000 or less, you can claim back 35 percent of your expenses. The percentage drops by one point for every $2,000 (or fraction thereof) your AGI exceeds $15,000, down to a floor of 20 percent. For example, if your AGI is $43,000 and you spent $3,000 on preschool, you can claim 20 percent of $3,000, which is $600 off your tax bill.

You do not have to itemize deductions to claim this credit. It works whether you take the standard deduction or itemize. You also do not have to be married to claim it—single parents and unmarried couples who file jointly can both use it.

Dependent Care FSA: Pre-tax money through your employer

A Dependent Care FSA is an account your employer may offer that lets you set aside money before taxes are taken out of your paycheck. You decide how much to contribute at the start of the year—up to $5,000 per year—and that money is deducted from your gross pay. You then use the account to pay for preschool and childcare, and you get the money back tax-free.

The advantage is that you avoid federal income tax, Social Security tax, and Medicare tax on the money you contribute. If you are in the 22 percent federal tax bracket and pay 7.65 percent in payroll taxes, setting aside $5,000 in a Dependent Care FSA saves you about $1,483 in taxes. However, not all employers offer this benefit, and you must enroll during your employer's open enrollment period, usually once a year.

The major drawback is the use-it-or-lose-it rule. Any money left in the account at the end of the year is forfeited—you cannot roll it over or get it back. For this reason, estimate conservatively. If you are unsure whether you will use the full $5,000, contribute less.

What counts as may have access to preschool and childcare

may have access to care includes licensed preschools, daycare centers, in-home daycare providers, nannies, babysitters, and au pairs—as long as the care is for a child under age 13 and allows you to work or attend school. Before-school and after-school care for school-age children also counts, as does summer daycare while you work.

Care does not have to be full-time. Part-time preschool counts if you work part-time. Care provided by a relative can count, but the relative cannot be your dependent (usually meaning they must earn income or live outside your home), and you must still report their name and tax ID on your return.

Expenses that do not count include kindergarten tuition and above (those may be covered by other education credits), overnight or residential care, summer camps that are primarily recreational rather than childcare, and any portion of preschool costs that go toward education rather than care. Some preschools separate the two on your invoice; if yours does, only the care portion counts.

Documents and information you need to gather

Before you file, collect the following for each child and each care provider: the child's full name and Social Security number, the care provider's name and tax ID (either their Social Security number if self-employed or their Employer Identification Number if they run a business), and receipts or statements showing what you paid and when. The IRS does not require you to attach these documents to your return, but you must keep them for your records in case of an audit.

If you use a nanny or in-home provider, you may also need to report that you paid them as a household employee on Schedule H. This is separate from the childcare credit but required if you paid any one household employee $2,400 or more in a year. Your tax software or preparer can walk you through this.

If you received dependent care benefits from your employer (such as a subsidy or reimbursement), you must report the amount on Form 2441 as well. This reduces the amount of expenses you can claim on the credit or FSA.

Choosing between the credit and the FSA

If your employer offers a Dependent Care FSA, you must decide whether to use it or claim the Child and Dependent Care Credit—you cannot claim both for the same expenses. The FSA is usually better if your employer offers it and you can predict your childcare costs accurately, because the tax savings are larger. However, the credit is better if you cannot estimate your costs, because you do not lose unused money.

Run the math both ways. Calculate what you would save with the FSA (multiply your expected expenses by your combined federal, state, and payroll tax rate). Then calculate the credit (multiply your expenses by the percentage based on your AGI). Whichever is larger is your better option. If you are unsure, a tax preparer can model both scenarios for you.

If you do not have access to an FSA, the credit is your only option, and it still provides meaningful savings for most households.

Frequently Asked Questions

Can I claim preschool if I am home with my other children?

Yes, as long as the preschool allows you to work, look for work, or attend school. It does not matter that you are also home with other children. The rule is whether the care enables you to do something that requires you to be away, not whether you are away the entire time.

What if my preschool provider does not have a tax ID or refuses to give me one?

You need the provider's name and tax ID to claim the credit or use an FSA. If they do not have one, ask them to provide their Social Security number or Employer Identification Number. If they refuse, you cannot claim the expense. Some providers are reluctant because they may not report the income; you can still report your side of the transaction, but the IRS may flag it if the provider does not match.

Does preschool count if my spouse stays home?

Only if the preschool allows you (the working spouse) to work. If both spouses stay home, preschool does not count. If one spouse works and the other stays home, the working spouse's childcare expenses count, but only up to the amount that spouse earned during the year.

Can I claim preschool for a child who is 13 or older?

No. The Child and Dependent Care Credit and Dependent Care FSA only cover children under age 13. Once a child turns 13, you cannot claim preschool or daycare expenses, though other education credits may explore depending on the type of care and the child's situation.

What happens if I contribute to an FSA but do not use all the money?

You lose it. The use-it-or-lose-it rule means any balance remaining at the end of the year is forfeited to your employer. Some plans offer a grace period of up to 2.5 months into the next year, but not all do. Check your plan documents. For this reason, contribute only what you are confident you will spend.