Combat pay
election. If you elected to
include nontaxable combat pay in
earned income when figuring the
earned income credit for 2004,
also include it in earned income
when you figure the amount of
dependent care benefits you
exclude or deduct from income.
For more information, see
chapter 38.
Reminders
Taxpayer
identification number needed for
each qualifying person. You
must include on line 2 of Form
2441 or Schedule 2 (Form 1040A)
the name and taxpayer
identification number (generally
the social security number) of
each qualifying person. See
Taxpayer identification number
under
Qualifying Person Test, later.
You may have to pay
employment taxes. If you pay
someone to come to your home and
care for your dependent or
spouse, you may be a household
employer who has to pay
employment taxes. Usually, you
are not a household employer if
the person who cares for your
dependent or spouse does so at
his or her home or place of
business. See
Employment Taxes for Household
Employers, later.
Introduction
This chapter discusses the
credit for child and dependent
care expenses and covers the
following topics.
Tests you must meet
to claim the credit.
How to figure the
credit.
How to claim the
credit.
Employment taxes you
may have to pay as a
household employer.
You may be able to claim the
credit if you pay someone to
care for your dependent who is
under age 13 or for your spouse
or dependent who is not able to
care for himself or herself. The
credit can be up to 35% of your
expenses. To qualify, you must
pay these expenses so you can
work or look for work.
This credit should not be
confused with the child tax
credit discussed in chapter 36.
Dependent
care benefits.
If you received any
dependent care benefits from
your employer during the
year, you may be able to
exclude from your income all
or part of them. You must
complete Part III of Form
2441 or Schedule 2 (Form
1040A) before you can figure
the amount of your credit.
See Dependent Care Benefits
under How To Figure the Credit,
later.
Useful Items - You
may want to see:
Publication
501
Exemptions, Standard
Deduction, and Filing
Information
503
Child and Dependent Care
Expenses
926
Household Employer's Tax
Guide
Form
(and Instructions)
2441
Child and Dependent Care
Expenses
Schedule 2 (Form 1040A)
Child and Dependent Care
Expenses for Form 1040A
Filers
Schedule H (Form 1040)
Household Employment
Taxes
W-7
Application for IRS
Individual Taxpayer
Identification Number
W-10
Dependent Care
Provider's
Identification and
Certification
Tests To Claim the
Credit
To be able to claim the
credit for child and dependent
care expenses, you must file
Form 1040 or Form 1040A, not
Form 1040EZ, and meet all the
following tests.
The care must be for
one or more qualifying
persons who are
identified on the form
you use to claim the
credit. (See
Qualifying Person
Test.)
You (and your spouse
if you are married) must
keep up a home that you
live in with the
qualifying person or
persons. (See
Keeping Up a Home
Test,
later.)
You (and your spouse
if you are married) must
have earned income
during the year.
(However, see
Rule for
student-spouse or spouse
not able to care for
self under
Earned Income Test,
later.)
You must pay child
and dependent care
expenses so you (and
your spouse if you are
married) can work or
look for work. (See
Work-Related Expense
Test,
later.)
You must make
payments for child and
dependent care to
someone you (or your
spouse) cannot claim as
a dependent. If you make
payments to your child,
he or she cannot be your
dependent and must be
age 19 or older by the
end of the year. (See
Payments to
Relatives
under
Work-Related Expense
Test,
later.)
Your filing status
must be single, head of
household, qualifying
widow(er) with dependent
child, or married filing
jointly. You must file a
joint return if you are
married, unless an
exception applies to
you. (See
Joint Return Test,
later.)
You must identify
the care provider on
your tax return. (See
Provider
Identification Test,
later.)
If you exclude or
deduct dependent care
benefits provided by a
dependent care benefits
plan, the total amount
you exclude or deduct
must be less than the
dollar limit for
qualifying expenses
(generally, $3,000 if
one qualifying person
was cared for or $6,000
if two or more
qualifying persons were
cared for). (If two or
more qualifying persons
were cared for, the
amount you exclude or
deduct will always be
less than the dollar
limit, since the amount
you can exclude or
deduct is limited to
$5,000. See
Reduced Dollar Limit
under
How To Figure the
Credit,
later.)
These tests are presented in
Figure 34-A and are also
explained in detail in this
chapter.
Your child and dependent
care expenses must be for
the care of one or more
qualifying persons.
A qualifying person is:
Your dependent
who was under age 13
when the care was
provided and for
whom you can claim
an exemption,
Your spouse who
was physically or
mentally not able to
care for himself or
herself, or
Your dependent
who was physically
or mentally not able
to care for himself
or herself and for
whom you can claim
an exemption (or
could claim an
exemption except the
person had $3,100 or
more of gross income
or filed a joint
return).
If you are divorced or
separated, see
Child of Divorced or
Separated Parents,
later, to determine which
parent may treat the child
as a qualifying person.
Physically or mentally
not able to care for
oneself.
Persons who cannot
dress, clean, or feed
themselves because of
physical or mental
problems are considered
not able to care for
themselves. Also,
persons who must have
constant attention to
prevent them from
injuring themselves or
others are considered
not able to care for
themselves.
Person
qualifying for part of
year. You
determine a person's
qualifying status each
day. For example, if the
person for whom you pay
child and dependent care
expenses no longer
qualifies on September
16, count only those
expenses through
September 15. Also see
Dollar Limit under
How To Figure the
Credit,
later.
Taxpayer identification
number.
You must include on
your return the name and
taxpayer identification
number (generally the
social security number)
of the qualifying
person(s). If the
correct information is
not shown, the credit
may be reduced or
disallowed.
Individual taxpayer
identification number
(ITIN) for aliens.
If your qualifying
person is a nonresident
or resident alien who
does not have and cannot
get a social security
number (SSN), use that
person's ITIN. To apply
for an ITIN, file Form
W-7 with the IRS. The
ITIN is entered wherever
an SSN is requested on a
tax return.
An ITIN is for tax use
only. It does not
entitle the holder to
social security benefits
or change the holder's
employment or
immigration status under
U.S. law.
Adoption taxpayer
identification number
(ATIN).
If your qualifying
person is a child who
was placed in your home
for adoption and for
whom you do not have an
SSN, you must get an
ATIN for the child. File
Form W-7A, Application
for Taxpayer
Identification Number
for Pending U.S.
Adoptions.
Child of
Divorced or
Separated
Parents
To be a qualifying
person, your child
usually must be your
dependent for whom you
can claim an exemption.
But there is an
exception to this rule
that applies if all of
the following are true.
You are
divorced or
separated under
a decree of
divorce or
separate
maintenance or a
written
separation
agreement, or
you lived apart
from the other
parent at all
times during the
last 6 months of
the year.
One or both
parents had
custody of the
child for more
than half of the
year.
One or both
parents provided
more than half
of the child's
support for the
year.
The child
was under age 13
or was
physically or
mentally not
able to care for
himself or
herself.
Either
The
custodial
parent
signed
Form
8332,
Release
of Claim
to
Exemption
for
Child of
Divorced
or
Separated
Parents,
or a
similar
statement,
agreeing
not to
claim
the
child's
exemption
for the
year, or
The
noncustodial
parent
provided
at least
$600 for
the
child's
support
and can
claim
the
child's
exemption
under a
pre-1985
decree
of
divorce
or
separate
maintenance
or
written
agreement.
For purposes of 5(a),
a similar statement
includes a divorce
decree or separation
agreement that went into
effect after 1984 that
allows the noncustodial
parent to claim the
child's exemption
without any conditions,
such as payment of
support.
If the exception
applies and you are the
custodial parent, you
can treat your child as
a qualifying person even
if you cannot claim the
child's exemption. If
you are the noncustodial
parent, you cannot treat
your child as a
qualifying person even
if you can claim the
child's exemption.
If the exception does
not apply, use the rules
described earlier to
determine whether your
child is a qualifying
person.
You can use Figure
34-B to see whether this
exception applies to
you.
Figure 34-B.
Is a Child
of Divorced
or Separated
Parents a
Qualifying
Person?
Example.
You are divorced
and have custody of
your 8-year-old
child. You sign Form
8332 to allow your
ex-spouse to take
the exemption. You
pay childcare
expenses so you can
work. Your child is
a qualifying person
and you, the
custodial parent,
can claim the credit
for those expenses,
even though your
ex-spouse claims an
exemption for the
child.
Custodial parent.
You are the
custodial parent if,
during the year, you
have custody of your
child longer than
your child's other
parent has custody.
Keeping Up a
Home Test
To claim the credit, you
must keep up a home. You and
one or more qualifying
persons must live in the
home.
You are keeping up a home
if you (and your spouse if
you are married) pay more
than half the cost of
running it for the year.
Home.
The home you keep up
must be the main home
for both you and the
qualifying person. Your
home can be the
qualifying person's main
home even if he or she
does not live there all
year because of his or
her:
Birth,
Death, or
Temporary
absence due to:
Sickness,
School,
Business,
Vacation,
Military
service,
or
Custody
agreement.
Costs
of keeping up home.
The costs of keeping
up a home normally
include property taxes,
mortgage interest, rent,
utility charges, home
repairs, insurance on
the home, and food eaten
at home.
Costs not included.
The costs of keeping
up a home do not include
payments for clothing,
education, medical
treatment, vacations,
life insurance,
transportation, or
mortgage principal.
They also do not
include the purchase,
permanent improvement,
or replacement of
property. For example,
you cannot include the
cost of replacing a
water heater. However,
you can include the cost
of repairing a water
heater.
Earned
Income Test
To claim the credit, you
(and your spouse if you are
married) must have earned
income during the year.
Earned
income.
Earned income includes
wages, salaries, tips,
other taxable employee
compensation, and net
earnings from
self-employment. A net
loss from
self-employment reduces
earned income. Earned
income also includes
strike benefits and any
disability pay you
report as wages.
Earned income also
includes nontaxable
employee compensation
such as parsonage
allowances, meals and
lodging furnished for
the convenience of the
employer, voluntary
salary deferrals,
military basic quarters
and subsistence
allowances and in-kind
quarters and
subsistence, and
military pay earned in a
combat zone.
Members of certain
religious faiths opposed
to social security.
Certain income earned
by persons who are
members of certain
religious faiths that
are opposed to
participation in Social
Security Act Programs
and have an IRS-approved
form that exempts
certain income from
social security and
Medicare taxes may not
be considered earned
income for this purpose.
See
Earned Income Test
in
Publication 503.
Not
earned income.
Earned income does not
include pensions or
annuities, social
security payments,
workers' compensation,
interest, dividends, or
unemployment
compensation. It also
does not include
scholarship or
fellowship grants,
except amounts paid to
you (and reported on
Form W-2) for teaching,
research, or other
services.
Rule
for student-spouse or
spouse not able to care
for self.
Your spouse is treated
as having earned income
for any month that he or
she is:
A full-time
student, or
Physically
or mentally not
able to care for
himself or
herself.
Figure the earned
income of the nonworking
spouse described under
(1) or (2) above as
explained under
Earned Income Limit,
later.
This rule applies to
only one spouse for any
one month. If, in the
same month, both you and
your spouse do not work
and are either full-time
students or physically
or mentally not able to
care for yourselves,
only one of you can be
treated as having earned
income in that month.
Full-time student.
You are a full-time
student if you are
enrolled at and attend a
school for the number of
hours or classes that
the school considers
full time. You must have
been a student for some
part of each of 5
calendar months during
the year. (The months
need not be
consecutive.) If you
attend school only at
night, you are not a
full-time student.
However, as part of your
full-time course of
study, you may attend
some night classes.
School. The
term school
includes elementary
schools, junior and
senior high schools,
colleges, universities,
and technical, trade,
and mechanical schools.
It does not include
on-the-job training
courses, correspondence
schools, and night
schools.
Work-Related
Expense Test
Child and dependent care
expenses must be work
related to qualify for the
credit. Expenses are
considered work related only
if both of the following are
true.
They allow you
(and your spouse if
you are married) to
work or look for
work.
They are for a
qualifying person's
care.
Working or
Looking for
Work
To be work related,
your expenses must allow
you to work or look for
work. If you are
married, generally both
you and your spouse must
work or look for work.
Your spouse is treated
as working during any
month he or she is a
full-time student or is
physically or mentally
not able to care for
himself or herself.
Your work can be for
others or in your own
business or partnership.
It can be either full
time or part time.
Work also includes
actively looking for
work. However, if you do
not find a job and have
no earned income for the
year, you cannot take
this credit. See
Earned Income Test,
earlier.
Whether your expenses
allow you to work or
look for work depends on
the facts. For example,
the cost of a sitter
while you and your
spouse go out to eat is
not normally a
work-related expense.
An expense is not
considered work related
merely because you had
it while you were
working. The purpose of
the expense must be to
enable you to work.
Volunteer work.
For this purpose,
you are not
considered to be
working if you do
unpaid volunteer
work or volunteer
work for a nominal
salary.
Work for part of
year. If you
work or actively
look for work during
only part of the
period covered by
the expenses, then
you must figure your
expenses for each
day. For example, if
you work all year
and pay care
expenses of $250 a
month ($3,000 for
the year), all the
expenses are work
related. However, if
you work or look for
work for only 2
months and 15 days
during the year and
pay expenses of $250
a month, your
work-related
expenses are limited
to $625 (21/ months
ื $250).
Payments while you
are out sick.
Do not count as
work-related
expenses amounts you
pay for child and
dependent care while
you are off work
because of illness.
These amounts are
not paid to allow
you to work. This
applies even if you
get sick pay and are
still considered an
employee.
Care of a
Qualifying
Person
To be work related,
your expenses must be to
provide care for a
qualifying person. You
do not have to choose
the least expensive way
of providing the care.
Expenses are for the
care of a qualifying
person only if their
main purpose is the
person's well-being and
protection.
Expenses for
household services
qualify if part of the
services is for the care
of qualifying persons.
See
Household services,
later.
Expenses not for
care. Expenses
for care do not
include amounts you
pay for food,
clothing, education,
and entertainment.
However, you can
include small
amounts paid for
these items if they
are incident to and
cannot be separated
from the cost of
caring for the
qualifying person.
Education.
Expenses to attend
first grade or a
higher grade are not
expenses for care.
Do not use these
expenses to figure
your credit.
Example 1.
You take your
3-year-old child to
a nursery school
that provides lunch
and educational
activities as a part
of its preschool
childcare service.
You can count the
total cost when you
figure the credit.
Example 2.
You place your
10-year-old child in
a boarding school so
you can work full
time. Only the part
of the boarding
school expense that
is for the care of
your child is a
work-related
expense. You can
count that part of
the expense in
figuring your credit
if it can be
separated from the
cost of education.
You cannot count any
part of the amount
you pay the school
for your child's
education.
Care outside your
home.
You can count the
cost of care
provided outside
your home if the
care is for your
dependent under age
13 or any other
qualifying person
who regularly spends
at least 8 hours
each day in your
home.
Dependent care
center.
You can count care
provided outside
your home by a
dependent care
center only if the
center complies with
all state and local
regulations that
apply to these
centers.
A dependent care
center is a place
that provides care
for more than six
persons (other than
persons who live
there) and receives
a fee, payment, or
grant for providing
services for any of
those persons, even
if the center is not
run for profit.
Camp.
The cost of
sending your child
to an overnight camp
is not considered a
work-related
expense.
Transportation.
The cost of
getting a qualifying
person from your
home to the care
location and back,
or from the care
location to school
and back, is not
considered a
work-related
expense. This
includes the costs
of bus, subway,
taxi, or private
car. Also, if you
pay the
transportation cost
for the care
provider to come to
your home, you
cannot count this
cost as a
work-related
expense.
Household services.
Expenses you pay
for household
services meet the
work-related expense
test if they are at
least partly for the
well-being and
protection of a
qualifying person.
Household services
are ordinary and
usual services done
in and around your
home that are
necessary to run
your home. They
include the services
of a housekeeper,
maid, or cook.
However, they do not
include the services
of a chauffeur,
bartender, or
gardener. See
Household
Services in
Publication 503 for
more information.
In this chapter,
the term housekeeper
refers to any
household employee
whose services
include the care of
a qualifying person.
Taxes paid on
wages.
The taxes you pay
on wages for
qualifying child and
dependent care
services are
work-related
expenses. See
Employment Taxes
for Household
Employers, later.
Payments to
Relatives
You can count
work-related payments
you make to relatives
who are not your
dependents, even if they
live in your home.
However, do not count
any amounts you pay to:
A dependent
for whom you (or
your spouse if
you are married)
can claim an
exemption, or
Your child
who was under
age 19 at the
end of the year,
even if he or
she is not your
dependent.
Joint Return
Test
Generally, married
couples must file a joint
return to take the credit.
However, if you are legally
separated or living apart
from your spouse, you may be
able to file a separate
return and still take the
credit.
Legally
separated. You are
not considered married
if you are legally
separated from your
spouse under a decree of
divorce or separate
maintenance. You are
eligible to take the
credit on a separate
return.
Married
and living apart.
You are not considered
married and are eligible
to take the credit if
all the following apply.
You file a
separate return.
Your home is
the home of a
qualifying
person for more
than half the
year.
You pay more
than half the
cost of keeping
up your home for
the year.
Your spouse
does not live in
your home for
the last 6
months of the
year.
Death
of spouse. If your
spouse died during the
year and you do not
remarry before the end
of the year, you
generally must file a
joint return to take the
credit. If you do
remarry before the end
of the year, the credit
can be claimed on your
deceased spouse's
separate return.
Provider
Identification
Test
You must identify all
persons or organizations
that provide care for your
child or dependent. Use Part
I of Form 2441 or Schedule 2
(Form 1040A) to show the
information.
Information needed.
To identify the care
provider, you must give
the provider's:
Name,
Address, and
Taxpayer
identification
number.
If the care provider
is an individual, the
taxpayer identification
number is his or her
social security number
or individual taxpayer
identification number.
If the care provider is
an organization, then it
is the employer
identification number
(EIN).
You do not have to
show the taxpayer
identification number if
the care provider is one
of certain tax-exempt
organizations (such as a
church or school). In
this case, write Tax-Exempt
in the space where the
tax form calls for the
number.
If you cannot provide
all of the information
or if the information
you provide is incorrect
you must be able to show
that you used due
diligence (discussed
later) in trying to
furnish the necessary
information.
Getting
the information.
You can use
Form W-10 to request
the required information
from the care provider.
If you do not use Form
W-10, you can get the
information from:
A copy of
the provider's
social security
card,
A copy of
the provider's
driver's license
(in a state
where the
license includes
the social
security
number),
A copy of
the provider's
completed Form
W-4 if he or she
is your
household
employee,
A copy of
the statement
furnished by
your employer if
the provider is
your employer's
dependent care
plan, or
A letter or
invoice from the
provider if it
shows the
information.
You should keep
this information with
your tax records. Do not
send Form W-10 (or other
document containing this
information) to the
Internal Revenue
Service.
Due
diligence.
If the care provider
information you give is
incorrect or incomplete,
your credit may not be
allowed. However, if you
can show that you used
due diligence in trying
to supply the
information, you can
still claim the credit.
You can show due
diligence by getting and
keeping the provider's
completed Form W-10 or
one of the other sources
of information listed
earlier. Care providers
can be penalized if they
do not provide this
information to you or if
they provide incorrect
information.
Provider refusal.
If the provider
refuses to give you
their identifying
information, you should
report whatever
information you have
(such as the name and
address) on the form you
use to claim the credit.
Write See
page 2 in the
columns calling for the
information you do not
have. On the bottom of
page 2, explain that you
requested the
information from the
care provider, but the
provider did not give
you the information.
This statement will show
that you used due
diligence in trying to
furnish the necessary
information.
How To Figure the
Credit
Your credit is a percentage
of your work-related expenses.
Your expenses are subject to the
earned income limit and the
dollar limit. The percentage is
based on your adjusted gross
income.
Figuring
Total
Work-Related
Expenses
To figure the credit for
2004 work-related expenses,
count only those you paid by
December 31, 2004.
Expenses prepaid in an
earlier year. If
you pay for services
before they are
provided, you can count
the prepaid expenses
only in the year the
care is received. Claim
the expenses for the
later year as if they
were actually paid in
that later year.
Expenses not paid until
the following year.
Do not count 2003
expenses that you paid
in 2004 as work-related
expenses for 2004. You
may be able to claim an
additional credit for
them on your 2004
return, but you must
figure it separately.
See
Payments for
previous year's expenses
under
Amount of Credit
in
Publication 503.
If you had
expenses in 2004 that
you did not pay until
2005, you cannot count
them when figuring your
2004 credit. You may be
able to claim a credit
for them on your 2005
return.
Expenses reimbursed.
If a state social
services agency pays you
a nontaxable amount to
reimburse you for some
of your child and
dependent care expenses,
you cannot count the
expenses that are
reimbursed as
work-related expenses.
Example.
You paid
work-related
expenses of $3,000.
You are reimbursed
$2,000 by a state
social services
agency. You can use
only $1,000 to
figure your credit.
Medical
expenses.
Some expenses for the
care of qualifying
persons who are not able
to care for themselves
may qualify as
work-related expenses
and also as medical
expenses. You can use
them either way, but you
cannot use the same
expenses to claim both a
credit and a medical
expense deduction.
If you use these
expenses to figure the
credit and they are more
than the earned income
limit or the dollar
limit, discussed later,
you can add the excess
to your medical
expenses. However, if
you use your total
expenses to figure your
medical expense
deduction, you cannot
use any part of them to
figure your credit.
Amounts excluded
from your income under
your employer's
dependent care benefits
plan cannot be used to
claim a medical expense
deduction.
Dependent
Care
Benefits
If you receive
dependent care benefits,
your dollar limit for
purposes of the credit
may be reduced. See
Reduced Dollar Limit,
later. But, even if you
cannot take the credit,
you may be able to take
an exclusion or
deduction for the
dependent care benefits.
Dependent care
benefits.
Dependent care
benefits include:
Amounts
your
employer
pays
directly to
either you
or your care
provider for
the care of
your
qualifying
person while
you work,
and
The fair
market value
of care in a
day-care
facility
provided or
sponsored by
your
employer.
Your salary may have
been reduced to pay
for these benefits.
If you received
benefits, they
should be shown on
your W-2 form. See
Statement for
employee,
later.
Exclusion or
deduction. If
your employer
provides dependent
care benefits under
a qualified plan,
you may be able to
exclude these
benefits from your
income. Your
employer can tell
you whether your
benefit plan
qualifies.
If you are
self-employed and
receive benefits
from a qualified
dependent care
benefit plan, you
are treated as both
employer and
employee. Therefore,
you would not get an
exclusion from wages
but instead a
deduction on
Schedule C (Form
1040), line 14;
Schedule E (Form
1040), line 18; or
Schedule F (Form
1040), line 17.
Partnerships would
report a
separately-stated
deduction on
Schedule K-1 (Form
1065), line 11, that
you enter on
Schedule E (Form
1040), line 28.
If your plan
qualifies, you must
complete Part III of
either Form 2441 or
Schedule 2 (Form
1040A) to claim the
exclusion or
deduction. You
cannot use Form
1040EZ.
The amount you can
exclude or deduct is
limited to the
smallest of:
The
total amount
of dependent
care
benefits you
received
during the
year,
The
total amount
of qualified
expenses you
incurred
during the
year,
Your
earned
income,
Your
spouse's
earned
income, or
$5,000
($2,500 if
married
filing
separately).
The definition of
earned income for
this purpose is not
exactly the same as
the definition for
the credit. See the
instructions for
Form 2441 or
Schedule 2 (Form
1040A).
Statement for
employee. Your
employer must give
you a Form W-2 (or
similar statement)
showing in box 10
the total amount of
dependent care
benefits provided to
you during the year
under a qualified
plan. Your employer
will also include
any dependent care
benefits over $5,000
in your wages shown
on your Form W-2 in
box 10.
Forfeitures.
Forfeitures are
amounts credited to
your dependent care
benefit account
(flexible spending
account) and
included in the
amount shown on your
Form W-2 in box 10,
but not received
because you did not
incur the expense.
When figuring your
exclusion, subtract
any forfeitures from
the total dependent
care benefits
reported by your
employer. To do
this, enter the
forfeited amount on
line 13 of Form 2441
or Schedule 2 (Form
1040A).
Forfeitures
do not include
amounts that you
expect to receive in
the future.
Effect of exclusion.
If you exclude
dependent care
benefits from your
income, the amount
of the excluded
benefits:
Is not
included in
your
work-related
expenses,
and
Reduces
the dollar
limit,
discussed
later.
Earned
Income Limit
The amount of
work-related expenses you
use to figure your credit
cannot be more than:
Your earned
income for the year
if you are single at
the end of the year,
or
The smaller of
your or your
spouse's earned
income for the year
if you are married
at the end of the
year.
Earned income is defined
under Earned Income Test,
earlier.
For purposes of item
(2), use your spouse's
earned income for the entire
year, even if you were
married for only part of the
year.
Separated spouse.
If you are legally
separated or married and
living apart from your
spouse (as described
under
Joint Return Test,
earlier),
you are not considered
married for purposes of
the earned income limit.
Use only your income in
figuring the earned
income limit.
Surviving spouse.
If your spouse died
during the year and you
file a joint return as a
surviving spouse, you
are not considered
married for purposes of
the earned income limit.
Use only your income in
figuring the earned
income limit.
Community property laws.
You should disregard
community property laws
when you figure earned
income for this credit.
Student-spouse or spouse
not able to care for
self. Your spouse
who is either a
full-time student or not
able to care for himself
or herself is treated as
having earned income.
His or her earned income
for each month is
considered to be at
least $250 if there is
one qualifying person in
your home, or at least
$500 if there are two or
more.
Spouse works.
If your spouse works
during that month, use
the higher of $250 (or
$500) or his or her
actual earned income for
that month.
Spouse qualifies for
part of month.
If your spouse is a
full-time student or not
able to care for himself
or herself for only part
of a month, the full
$250 (or $500) still
applies for that month.
Both spouses qualify.
If, in the same month,
both you and your spouse
are either full-time
students or not able to
care for yourselves,
only one spouse can be
considered to have this
earned income of $250
(or $500) for that
month.
Dollar Limit
There is a dollar limit
on the amount of your
work-related expenses you
can use to figure the
credit. This limit is $3,000
for one qualifying person,
or $6,000 for two or more
qualifying persons.
If you paid
work-related expenses for
the care of two or more
qualifying persons, the
$6,000 limit does not need
to be divided equally among
them. For example, if your
work-related expenses for
the care of one qualifying
person are $3,200 and your
work-related expenses for
another qualifying person
are $2,800, you can use the
total, $6,000, when figuring
the credit.
Yearly
limit. The dollar
limit is a yearly limit.
The amount of the dollar
limit remains the same
no matter how long,
during the year, you
have a qualifying person
in your household. Use
the $3,000 limit if you
paid work-related
expenses for the care of
one qualifying person at
any time during the
year. Use $6,000 if you
paid work-related
expenses for the care of
more than one qualifying
person at any time
during the year.
Reduced
Dollar Limit
If you received
dependent care benefits
that you exclude or
deduct from your income,
you must subtract that
amount from the dollar
limit that applies to
you. Your reduced dollar
limit is figured on
lines 28 through 32 of
Form 2441 or lines 24
through 28 of Schedule 2
(Form 1040A). See
Dependent Care
Benefits,
earlier, for information
on excluding or
deducting these
benefits.
Example.
George is a
widower with one
child and earns
$24,000 a year. He
pays work-related
expenses of $2,900
for the care of his
4-year-old child and
qualifies to claim
the credit for child
and dependent care
expenses. His
employer pays an
additional $1,000
under a dependent
care benefit plan.
This $1,000 is
excluded from
George's income.
Although the
dollar limit for his
work-related
expenses is $3,000
(one qualifying
person), George
figures his credit
on only $2,000 of
the $2,900
work-related
expenses he paid.
This is because his
dollar limit is
reduced as shown
next.
George's
Reduced
Dollar
Limit
1)
Maximum
allowable
expenses
for one
qualifying
person
$3,000
2)
Minus:
Dependent
care
benefits
George
excludes
from
income
-1,000
3)
Reduced
dollar
limit on
expenses
George
can use
for the
credit
$2,000
Amount of
Credit
To determine the amount
of your credit, multiply
your work-related expenses
(after applying the earned
income and dollar limits) by
a percentage. This
percentage depends on your
adjusted gross income shown
on Form 1040, line 37, or
Form 1040A, line 22. The
following table shows the
percentage to use based on
adjusted gross income.
IF your
adjusted gross
income is:
THEN
the
Over
But not over
percentage
is:
$0
$15,000
35%
15,000
17,000
34%
17,000
19,000
33%
19,000
21,000
32%
21,000
23,000
31%
23,000
25,000
30%
25,000
27,000
29%
27,000
29,000
28%
29,000
31,000
27%
31,000
33,000
26%
33,000
35,000
25%
35,000
37,000
24%
37,000
39,000
23%
39,000
41,000
22%
41,000
43,000
21%
43,000
No limit
20%
How To Claim the
Credit
To claim the credit, you can
file Form 1040 or Form 1040A.
You cannot claim the credit on
Form 1040EZ.
Form 1040.
You must complete Form
2441 and attach it to your
Form 1040. Enter the credit
on Form 1040, line 47. An
example of a filled-in Form
2441 is at the end of this
chapter.
Form 1040A.
You must complete Schedule
2 (Form 1040A) and attach it
to your Form 1040A. Enter
the credit on your Form
1040A, line 29.
Limit on
credit. The amount of
credit you can claim is
limited to the amount of
your regular tax (after
reduction by any allowable
foreign tax credit) plus
your alternative minimum
tax, if any. For more
information, see the
instructions for Form 2441
or Schedule 2 (Form 1040A).
Tax
credit not refundable.
You cannot get a refund
for any part of the credit
that is more than this
limit.
Recordkeeping. You
should keep records of your
work-related expenses. Also, if
your dependent or spouse is not
able to care for himself or
herself, your records should
show both the nature and the
length of the disability. Other
records you should keep to
support your claim for the
credit are described earlier
under Provider Identification
Test.
Employment Taxes for
Household Employers
If you pay someone to come to
your home and care for your
dependent or spouse, you may be
a household employer. If you are
a household employer, you will
need an employer identification
number (EIN) and you may have to
pay employment taxes. If the
individuals who work in your
home are self-employed, you are
not liable for any of the taxes
discussed in this section.
Self-employed persons who are in
business for themselves are not
household employees. Usually,
you are not a household employer
if the person who cares for your
dependent or spouse does so at
his or her home or place of
business.
If you use a placement agency
that exercises control over what
work is done and how it will be
done by a babysitter or
companion who works in your
home, that person is not your
employee. This control could
include providing rules of
conduct and appearance and
requiring regular reports. In
this case, you do not have to
pay employment taxes. But, if an
agency merely gives you a list
of sitters and you hire one from
that list, the sitter may be
your employee.
If you have a household
employee you may be subject to:
Social security and
Medicare taxes,
Federal unemployment
tax, and
Federal income tax
withholding.
Social security and Medicare
taxes are generally withheld
from the employee's pay and
matched by the employer. Federal
unemployment (FUTA) tax is paid
by the employer only and
provides for payments of
unemployment compensation to
workers who have lost their
jobs. Federal income tax is
withheld from the employee's
total pay if the employee asks
you to do so and you agree.
For more information on a
household employer's tax
responsibilities, see
Publication 926 and Schedule H
(Form 1040) and its
instructions.
State
employment tax.
You may also have to pay
state unemployment tax.
Contact your state
unemployment tax office for
information. You should also
find out whether you need to
pay or collect other state
employment taxes or carry
workers' compensation
insurance. A list of state
employment tax agencies,
including addresses and
phone numbers, is in
Publication 926.
Example
The following example shows
how to figure the credit for
child and dependent care
expenses for two children when
employer-provided dependent care
benefits are involved. The
filled-in Form 2441 is shown at
the end of this chapter.
Illustrated
example. Joan Thomas
is divorced and has two
children, ages 3 and 9. She
works at ACME Computers. Her
adjusted gross income (AGI)
is $29,000, and the entire
amount is earned income.
Joan's younger child
(Susan) stays at her
employer's on-site childcare
center while she works. The
benefits from this childcare
center qualify to be
excluded from her income.
Her employer reports the
value of this service as
$3,000 for the year. This
$3,000 is shown in her Form
W-2 in box 10 but is not
included in taxable wages in
box 1.
A neighbor cares for
Joan's older child (Seth)
after school, on holidays,
and during the summer. Joan
pays her neighbor $2,400 for
this care.
Joan figures her credit on
Form 2441 as follows.
1)
Work-related
expenses Joan
paid
$2,400
2)
Dollar limit (2
or more
qualified
individuals)
$6,000
3)
Minus: Dependent
care benefits
excluded from
Joan's income
-3,000
4)
Reduced dollar
limit
$3,000
5)
Lesser of
expenses paid
($2,400) or
dollar limit
($3,000)
$2,400
6)
Percentage for
AGI of $29,000
28%(.28)
7)
Multiply the
amount on line 5
by the
percentage on
line 6 ($2,400 x
.28)
