Childcare Deductions After HOTMA: What Qualifies and Where They Actually Apply

Erica Davis
Jun 3
4 min read

Childcare deductions can make a meaningful difference for qualifying households—but they’re often misunderstood, misapplied, or used in the wrong program altogether. HOTMA didn’t eliminate this deduction, but it does require teams to be precise about when and how it applies.

📌 Introduction

Childcare expenses can reduce adjusted income—but only in programs that actually use adjusted income.

Under HOTMA, the rules for childcare deductions did not change—but the expectation for accuracy and proper application did.

👉🏾 This deduction is tied to adjusted income calculations

👉🏾 It does not apply across all affordable housing programs

👉🏾 The file must clearly support both the expense and the purpose

Understanding where this deduction applies is just as important as knowing how to calculate it.

📊 Where Childcare Deductions Apply

Childcare deductions apply in programs that calculate adjusted income, including:

✔️ HUD programs (Section 8, PBRA, PBV, Public Housing)

✔️ Rural Development (RD 515)

👉🏾 These programs allow deductions because rent is based on adjusted income, not just gross income

🚫 Where They Do NOT Apply

Childcare deductions are not used in:

❌ LIHTC (Section 42)

❌ HOME Program

👉🏾 These programs rely on gross annual income only

👉🏾 There are no expense-based deductions used to determine eligibility or rent

⚠️ Why This Matters (Layered Properties)

This is where teams get tripped up.

On layered properties:

You may calculate LIHTC eligibility using gross income
While also calculating HUD rent using adjusted income

👉🏾 That means the same household may have a childcare deduction for one program—but not the other

👉🏾 Each program must be calculated separately and correctly

📊 When This Applies (Certification Types)

For applicable programs (HUD/RD), childcare deductions should be evaluated during:

✔️ Move-In Certifications

✔️ Annual Recertifications

✔️ Interim Recertifications (when applicable)

👉🏾 Always ask about childcare—even if it wasn’t previously claimed

📊 Who Qualifies?

A household may qualify only when all conditions are met:

The care must be for:

A child under age 13, or

A disabled dependent of any age

AND

The care must enable:

Work, job search, or school/training

AND

There must be:

No other adult household member available to provide care

👉🏾 If an adult is available and able to provide care, the deduction generally does not apply.

📐 The Earned Income Cap

The childcare deduction cannot exceed the earned income of the household member it supports.

👉🏾 Always use the lower of:

Childcare expenses or earned income

📊 Example 1: Full Deduction

Childcare: $8,000Earned income: $22,000

👉🏾 Allowed deduction: $8,000

📊 Example 2: Capped Deduction

Childcare: $12,000Earned income: $10,000

👉🏾 Allowed deduction: $10,000

📌 What Counts as Childcare

✔️ Eligible Expenses:

Daycare or childcare center fees
Before- and after-school programs
Day camps (not overnight)
Babysitters or nannies (including informal care)
Au pair (childcare portion)
Pre-K when it enables work or school

❌ Not Eligible:

Overnight camps
Tutoring
Extracurricular activities
Care provided by a household member

📂 Documentation Requirements

Childcare deductions must be supported in the file.

Examples include:

Provider statement (name, dates, cost)
Proof of payment (receipts, bank records)
Employment or school verification
Statement of need

For informal care:

Include provider details, schedule, and amount paid

👉🏾 Self-certification may be used when stronger documentation is not available—but it should explain the arrangement and why other verification could not be obtained

👉🏾 The file must support both the expense and the reason the care qualifies

📊 Ongoing Eligibility Matters

Childcare deductions must be reviewed at each certification.

Watch for:

Children aging out
Changes in work or school status
Changes in childcare arrangements

👉🏾 What qualified before may not qualify now

⚠️ Common Mistakes

❌ Applying childcare deductions to LIHTC or HOME files

❌ Not connecting childcare to work, school, or job search

❌ Missing the earned income cap

❌ Weak or missing documentation

❌ Not updating at recertification

👉🏾 Most issues come from applying the right rule in the wrong program

🔄 A Practical Approach

Identify which program rules apply
Confirm eligibility for the deduction
Tie childcare to a qualifying activity
Apply the earned income cap
Collect and review documentation
Re-evaluate at recertification
Clearly document the calculation

👉🏾 The goal is to apply the deduction correctly—and only where it belongs

📋 Quick Checklist

Before finalizing the file, use this quick checklist to make sure the deduction is being applied correctly and in the right program.

Program uses adjusted income (HUD/RD)
Child meets age/disability requirement
Care enables work, job search, or school
No other adult is available
Expenses are allowable
Documentation supports the claim
Earned income cap is applied
Calculation is clearly documented

🎯 The Bottom Line

Childcare deductions still matter after HOTMA—but only in the right programs.

👉🏾 They apply to HUD and RD

👉🏾 They do not apply to LIHTC or HOME

👉🏾 The earned income cap still applies

👉🏾 Documentation is still required

Handled correctly, this deduction supports the household.

Handled incorrectly, it creates findings.

💼🏾 Need help navigating HOTMA and keeping your files clean across multiple programs? The TCC Firm supports compliance teams with hands-on training, file reviews, and compliance alignment across HUD, LIHTC, HOME, and RD programs.

👉🏾 Contact us to get started.