If you are an Alabama parent or caretaker, own a business or child care facility, there may be new financial child care resources available to you.

In 2024, Gov. Kay Ivey signed the “Working for Alabama” legislative package, which included a state child care tax credit bill that legislators said will help increase the state’s low labor force participation rate. Eligible businesses and child care facilities can apply now.

“The goal was really to create support for expansion, improvement and operation of child care facilities and really targeting underserved areas and working families,” Kim Cochran, spokesperson of the Women’s Foundation of Alabama, told AL.com.

“This is an example of good public policy. The legislature did its part, advocates and organizations across the state supported it, the governor signed it into law. However, it is only as strong as its utilization and take up rate. In order for this tax credit to work in the way it was intended, it has to be utilized by businesses and child care facilities.”

As many as 19% of working parents in Alabama said they had to miss work due to child care issues, the U.S. Bureau of Labor Statistics found in 2021. In 2022, almost 85,000 Alabama families needed access to child care but had no affordable, quality options in their communities, according to the Women’s Foundation of Alabama.

The state tax credit is different from similar federal tax credit programs.

What you need to know about the Alabama child care tax credit:

The Alabama Child Care Tax Credit law was created to incentivize investments in child care infrastructure and services and increase accessibility and quality.

The law targets businesses and child care facilities in an effort to improve workforce participation by ensuring parents and caretakers have accessible child care when they are at work.

The Alabama Child Care Tax Credit law contains tax credits for employers and child care providers.

There is a priority allocation that ensures a portion of funds are reserved for small businesses, child care providers in rural areas and nonprofit providers in rural areas.

The law provides a tax incentive to Alabama employers who support their employees’ child care needs by offering financial assistance for child care expenses or establishing and operating child care facilities for their employees with children five years old or younger.

An employer can claim a tax credit for 75% of the eligible child care expenses. And small businesses with fewer than 25 employees are eligible to claim a credit for 100% of their eligible expenses.

An employer is eligible to receive a tax credit for qualifying expenses up to $600,000 per year.

The tax credit has an annual aggregate cap at $15 million for 2025, $17.5 million for 2026 and $20 million for 2027, of which 25% of each annual cap is reserved for small businesses and businesses in rural areas.

The law also provides a tax incentive to Alabama child care providers who own and operate a qualified child care facility licensed by the Alabama Department of Human Resources and participate in the Quality Rating and Improvement System and Child Care Subsidy Program.

According to the Alabama Department of Revenue, an eligible employer and child care provider may receive a tax credit of up to $25,000 per year to be used for:

• Income taxes
• State portion of the financial institution excise tax
• Insurance premiums tax
• Utility license tax

The credit will be based on the average monthly number of eligible children enrolled in the program and the facility’s quality rating under the Alabama Quality STARS program:

• Five-star rating: $2,000 per child.
• Four-star rating: $1,750 per child.
• Three-star rating: $1,500 per child.
• Two-star rating: $1,250 per child.
• One-star rating: $1,000 per child.

Additional resources for employers and child care providers are available on the Women’s Foundation of Alabama website.

For parents and caretakers, the Child and Dependent Care Tax Credit helps working parents offset the cost of child care. However, the current Child and Dependent Care Tax Credit benefit levels were set in 2001 and have not been adjusted with inflation or the current cost of child care, according to the First Five Years Fund.

How to apply for the Alabama child care tax credit as a provider or parent:

The tax credit is applicable beginning January 1, 2025, and ending December 31, 2027.

Starting March 1, 2025, eligible employers and child care providers can reserve their credit allocations through My Alabama Taxes.

Once a credit is reserved, employers and child care providers must submit documentation of their qualifying expenses to claim the refund on their tax returns.

Child care providers must provide documentation including ownership verification, quality rating of the facility and the average number of eligible children attending each facility monthly for the calendar year.

Employers must provide documentation including receipts, contracts with child care providers and payroll records.

It is best to file early, as the tax credit is first-come, first-serve.

Additional questions regarding how to apply for the employer and child care facility tax credit can be directed to [email protected].

If you are a parent or caretaker and paid someone to care for your child so you, and your spouse if filing jointly, could work or look for work, you can apply for the Child and Dependent Care Tax Credit.

The credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying children to enable you to go to work, look for work or attend school.

To claim a Child and Dependent Care Tax Credit, complete Form 2441, Child and Dependent Care Expenses and include the form when you file your federal income tax return. You will need to provide a valid taxpayer identification number, such as a social security number, for each qualifying person.

For more information about the Child and Dependent Care Tax Credit, visit the First Five Years Fund website.

For more information on how to apply for a tax credit as a parent or caretaker, visit the IRS website.