Can Taxpayers Claim State Credits for Child and Dependent Care Expenses?

A little more than half the states with a personal income tax provide a credit to individual taxpayers for child or dependent care expenses. Most of the state income tax credits piggyback on the federal credit under IRC Sec. 21.

Federal Credit

IRC Sec. 21 allows eligible individuals an income tax credit for some child or dependent care expenses. The credit applies to expenses paid for the care of a qualifying individual, so the taxpayer can work or look for work. Qualifying individuals include:

• children under 13; and
• disabled spouses or dependents who cannot care for themselves and live with the taxpayer for more than half the year.

The American Rescue Plan Act enhanced taxpayer benefits for the 2021 tax year by:

• making the credit refundable if it exceeds a taxpayer’s federal income tax liability;
• increasing the credit cap from 30% to 50% of work-related expenses;
• raising the expense limits from $3,000 to $6,000 for 1 qualifying individual and from $6,000 to $16,000 for 2 or more qualifying individuals;
• changing the adjusted gross income (AGI) threshold at which the credit starts to phaseout from $15,000 to $125,000; and
• expanding credit eligibility to taxpayers living in U.S. territories.

State Credits

20 states and the District of Columbia permit child or dependent care expense credits for the 2021 tax year. The credits generally range from 7% to 100% of the federal credit.

Louisiana and Maine taxpayers can claim an additional credit for child-care services that meet certain quality standards.

12 states have credit thresholds based on the taxpayer’s AGI.

Hawaii offers a credit that is not tied to the federal credit. The credit in Hawaii ranges from 15% to 25% of child or dependent care expenses based on the taxpayer’s AGI.

Maine’s credit for adult dependent care is 50% of expenses. Taxpayers cannot include expenses used to claim the federal credit. The credit phases out based on the taxpayer’s AGI.

New Mexico’s credit is 40% of day care expenses. It is subject to a modified gross income threshold. Taxpayers must also reduce the credit by the amount of the federal credit applied against the taxpayer’s federal income tax liability.

Oregon has a credit based on:

• the taxpayer’s household size;
• the taxpayer’s AGI as a percentage of the federal poverty level; and
• the federal credit.

Child and dependent care expense credits are refundable in 13 states.