Having children creates some of the most valuable tax credits available to ordinary Americans. The Child Tax Credit was permanently increased by OBBBA to $2,200 per qualifying child, with up to $1,700 refundable even if you owe no tax. Stack the child and dependent care credit on top for childcare costs, use a dependent care FSA to run childcare expenses through pre-tax dollars, and claim the earned income credit if your income qualifies. Together, these credits can reduce your tax bill by thousands.
Child Tax Credit: $2,200 per qualifying child under age 17. Up to $1,700 refundable (Additional Child Tax Credit).
Income phaseout: Credit begins to reduce when income exceeds $400,000 (MFJ) or $200,000 (single). Reduces by $50 per $1,000 over the threshold.
Child & Dependent Care Credit: 20-50% (50% reduced to 35% as AGI exceeds $15,000, then to 20% as AGI exceeds $75,000, or $150,000 joint) of up to $3,000 of care expenses (one child) or $6,000 (two or more children).
Dependent Care FSA: Up to $7,500 ($3,750 MFS) pre-tax through employer (reduces the amount eligible for the care credit dollar-for-dollar).
There are two types of dependents for tax purposes - a qualifying child and a qualifying relative. The distinction matters because different credits and deductions apply to each.
To claim the Child Tax Credit, your child must meet five tests: (1) relationship - your child, stepchild, foster child, sibling, or descendant of any of these; (2) age - under 17 at the end of the tax year; (3) residency - lived with you for more than half the year; (4) dependency - did not provide more than half their own support; (5) joint return - did not file a joint return with a spouse (except to claim a refund).
A qualifying relative is someone who does not meet the qualifying child tests but still depends on you for support. They must have gross income below $5,300 (2026) and you must provide more than half their support. Qualifying relatives do not generate the Child Tax Credit but do allow you to claim the dependent exemption for head-of-household filing status and the dependent care credit if applicable.
OBBBA permanently raised the Child Tax Credit to $2,200 per qualifying child under age 17, with a refundable portion (Additional Child Tax Credit or ACTC) of up to $1,700. The ACTC is 15% of earned income above $2,500 - meaning you need at least $13,833 of earned income to claim the full $1,700 refundable portion.
The credit begins phasing out when your modified AGI exceeds $400,000 (MFJ) or $200,000 (all others). The reduction is $50 for every $1,000 (or fraction) above the threshold. The $2,200 credit for one child is fully phased out at $444,000 (MFJ) or $244,000 (all others): $2,200 / $50 = 44 increments of $1,000 above the threshold.
If you pay for childcare so you (and your spouse, if MFJ) can work or look for work, you may claim the child and dependent care credit. The credit percentage ranges from 20% to 50% of qualifying expenses, with the higher percentages for lower income levels. Above $75,000 of AGI ($150,000 on a joint return), the 35% rate steps down by 1 percentage point for each $2,000 ($4,000 on a joint return) or fraction of AGI over that amount, and reaches the 20% floor once AGI exceeds $103,000 ($206,000 on a joint return) (IRC §21(a)(2)(B)).
| Situation | Eligible Expenses Cap | Maximum Credit (20%) |
|---|---|---|
| One qualifying child or disabled dependent | $3,000 | $600 |
| Two or more qualifying children | $6,000 | $1,200 |
Qualifying expenses include daycare, after-school programs, summer day camps, and babysitters. Overnight camps do not qualify. The child must be under age 13 (or any age if disabled and incapable of self-care).
A Dependent Care Flexible Spending Account (DC FSA) lets you pay up to $7,500 per year ($3,750 if married filing separately) in childcare expenses with pre-tax dollars through your employer. The tax savings come from avoiding income tax and FICA tax on the amount contributed - effectively a 25-35% discount on childcare depending on your tax bracket.
If you are unmarried and pay more than half the cost of maintaining a home for a qualifying child or qualifying relative, you qualify for Head of Household (HOH) filing status. HOH has lower tax rates than Single and a larger standard deduction ($24,150 in 2026 vs. $16,100 for single filers). Filing as HOH instead of Single on a $60,000 income can save $1,500-$2,500 in tax.