32. Child and Dependent Care Credit
Table of Contents
* What's New
* Reminders
* Introduction
* Useful Items - You may want to see:
* Tests To Claim the Credit
o Qualifying Person Test
o Earned Income Test
o Work-Related Expense Test
o Joint Return Test
o Provider Identification Test
* How To Figure the Credit
o Figuring Total Work-Related Expenses
o Earned Income Limit
o Dollar Limit
o Amount of Credit
* How To Claim the Credit
o Tax credit not refundable.
* Employment Taxes for Household Employers
* Example
What's New
Keeping up home test eliminated. Generally, you no longer need to pay over
half the cost of keeping up a home for a qualifying person. However, the
qualifying person must live with you for more than half of 2005. See
Qualifying Person Test for more information.
Qualifying person. To be your qualifying person, a child generally must be
your “qualifying child.” See Qualifying Person Test, later.
Katrina Emergency Tax Relief Act of 2005. This Act provides tax relief for
persons affected by Hurricane Katrina. Under the Act, the special rule for
a spouse who is a full-time student may still apply if he or she was unable
to attend classes because of Hurricane Katrina. See Publication 4492.
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.
Caution
This credit should not be confused with the child tax credit discussed in
chapter 34.
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.
1.
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.)
2.
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.)
3.
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.)
4.
You must make payments for child and dependent care to someone
neither you nor your spouse can 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. You cannot make payments to your spouse or to
the parent of your qualifying child who is your qualifying person and is
under age 13. (See Payments to Relatives or Dependents under Work-Related
Expense Test, later.)
5.
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.)
6.
You must identify the care provider on your tax return. (See Provider
Identification Test, later.)
7.
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 32-A and are also explained in detail
in this chapter.
This image is too large to be displayed in the current screen. Please click
the link to view the image.
Figure 32-A Can You Claim the Credit?
Qualifying Person Test
Your child and dependent care expenses must be for the care of one or more
qualifying persons.
A qualifying person is:
1.
Your qualifying child who is your dependent and who was under age 13
when the care was provided,
2.
Your spouse who was physically or mentally not able to care for
himself or herself and lived with you for more than half the year, or
3.
A person who was physically or mentally not able to care for himself
or herself, lived with you for more than half the year, and either:
1.
Was your dependent, or
2.
Would have been your dependent except that (i) he or she
received gross income of $3,200 or more, (ii) he or she filed a joint
return, or (iii) you, or your spouse if filing jointly, could be claimed as
a dependent on someone else's 2005 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.
Dependent defined. A dependent is a person, other than you or your
spouse, for whom you can claim an exemption. To be your dependent, a person
must be your qualifying child (or your qualifying relative).
Qualifying child. To be your qualifying child, a child must live with you
for more than half the year and meet other requirements.
More information. For more information about who is a dependent or a
qualifying child, see chapter 3.
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, see Form W-7. 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. Even if you cannot claim your
child as a dependent, he or she is treated as your qualifying person if:
*
The child was under age 13 or was physically or mentally not able to
care for himself or herself,
*
You were the child's custodial parent (the parent with whom the child
lived for the greater part of 2005), and
*
The noncustodial parent is entitled to claim the child as a dependent
under the special rules for a child of divorced or separated parents.
In that case, the noncustodial parent cannot treat the child as a
qualifying person.
To find out when a noncustodial parent is entitled to claim the
dependency exemption for a child, see Children of divorced or separated
parents in chapter 3.
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:
1.
A full-time student, or
2.
Physically or mentally not able to care for himself or herself. (Your
spouse also must live with you for more than half the year.)
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 enrolled in school before August 25, 2005, you are treated as a
full-time student for any month of the enrollment period you were unable to
attend classes because of Hurricane Katrina.
School. The term “school” includes elementary schools, junior and senior
high schools, colleges, universities, and technical, trade, and mechanical
schools. A school does not include an on-the-job training course,
correspondence school, or Internet school.
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 for a child in nursery school, pre-school, or similar
programs for children below the level of kindergarten are expenses for
care. Expenses to attend kindergarten 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. The cost of sending your child to a day
camp may be a work-related expense, even if the camp specializes in a
particular activity, such as computers or soccer.
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 or Dependents
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:
1.
A dependent for whom you (or your spouse if you are married) can
claim an exemption,
2.
Your child who was under age 19 at the end of the year, even if he or
she is not your dependent,
3.
Your spouse, or
4.
The parent of your qualifying child who is your qualifying person and
is under
age 13.
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.
1.
You file a separate return.
2.
Your home is the home of a qualifying person for more than half the year.
3.
You pay more than half the cost of keeping up your home for the year.
4.
Your spouse does not live in your home for the last 6 months of the year.
Costs of keeping up a 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.
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.
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:
1.
Name,
2.
Address, and
3.
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, enter “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:
1.
A copy of the provider's social security card,
2.
A copy of the provider's driver's license (in a state where the
license includes the social security number),
3.
A copy of the provider's completed Form W-4 if he or she is your
household employee,
4.
A copy of the statement furnished by your employer if the provider is
your employer's dependent care plan, or
5.
A letter or invoice from the provider if it shows the information.
Records you should keep
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. Enter “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 2005 work-related expenses, count only those you
paid by December 31, 2005.
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 2004 expenses
that you paid in 2005 as work-related expenses for 2005. You may be able to
claim an additional credit for them on your 2005 return, but you must
figure it separately. See Payments for previous year's expenses under
Amount of Credit in Publication 503.
Tip
If you had expenses in 2005 that you did not pay until 2006, you cannot
count them when figuring your 2005 credit. You may be able to claim a
credit for them on your 2006 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.
Caution
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:
1.
Amounts your employer pays directly to either you or your care
provider for the care of your qualifying person while you work, and
2.
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.
Benefits you received as a partner should be shown in box 13 of your
Schedule K-1 (Form 1065) with code O. Enter the amount of these benefits on
Form 2441, line 12.
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.
If your plan qualifies, you must complete Part III of either Form 2441 or
Schedule 2 (Form 1040A) to claim the exclusion. You cannot use Form 1040EZ.
You must use Form 2441 to claim the deduction.
The amount you can exclude or deduct is limited to the smallest of:
1.
The total amount of dependent care benefits you received during the year,
2.
The total amount of qualified expenses you incurred during the year,
3.
Your earned income,
4.
Your spouse's earned income, or
5.
$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.
Effect of exclusion. If you exclude dependent care benefits from your
income, the amount of the excluded benefits:
1.
Is not included in your work-related expenses, and
2.
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:
1.
Your earned income for the year if you are single at the end of the
year, or
2.
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.
Tip
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.
Tip
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 22 through 26 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
38, 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 48. 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.
Tax credit not refundable. You cannot get a refund for any part of the
credit that is more than this limit.
Records you should keep
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:
1.
Social security and Medicare taxes,
2.
Federal unemployment tax, and
3.
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 on 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) $ 672
8) Enter the amount from Form 1040, line 46 $1,296
9) Enter the amount from Form 1040, line 47 -0-
10) Subtract line 9 from line 8 1,296
11) Credit
(Enter the smaller of line 7 or line 10) $672
This image is too large to be displayed in the current screen. Please click
the link to view the image.
Form 2441,Forms: 2441Page 1
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the link to view the image.
Form 2441, Page 2
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