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 2002 work-related expenses, count only those you paid by December 31, 2002.
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 2001 expenses that you paid in 2002 as work-related expenses for 2002. You may be able to claim an additional credit for
them on your 2002 return, but you must figure it separately. See Payments for previous year's expenses under Amount of Credit in
If you had expenses in 2002 that you did not pay until 2003, you cannot count them when figuring your 2002 credit. You may be able to claim a
credit for them on your 2003 return.
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.
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
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
Employer-Provided 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,
- 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.
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 it does, you must complete Part III of either Form 2441 or Schedule 2 (Form 1040A) to claim the
exclusion even if you cannot take the credit. You cannot use Form 1040EZ.
The amount you can exclude 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).
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 in box 1 of
your Form W-2.
Forfeitures are amounts credited to your dependent care benefit account (flexible spending account) and included in the amount shown in box 10 of
your Form W-2, 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.
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.
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 $200 if there is one qualifying person in your home, or at least $400 if there are two or more.
If your spouse works during that month, use the higher of $200 (or $400) 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 $200 (or $400) 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 $200 (or $400) for that month.
There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $2,400 for one qualifying
person, or $4,800 for two or more qualifying persons.
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 $2,400 limit if you paid work-related expenses for the care of one qualifying person at any time during the year.
Use $4,800 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 from your employer that you exclude from your income, you must subtract that amount from the dollar limit
that applies to you. Your reduced dollar limit is figured on lines 20 through 24 of Form 2441 or Schedule 2 (Form 1040A). See Employer-Provided
Dependent Care Benefits, earlier, for information on excluding these benefits.
George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $1,900 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 $2,400 (one qualifying person), George figures his credit on only $1,400 of the $1,900
work-related expenses he paid. This is because his dollar limit is reduced as shown next.
||George's Reduced Dollar Limit
||Maximum allowable expenses for one qualifying person
||Minus: Dependent care benefits George excludes from income
||Reduced dollar limit on expenses George can use for the credit
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 line 36 of Form 1040 or line 22 of Form 1040A. The following table shows the percentage
to use based on adjusted gross income.
|IF your adjusted gross income is
||THEN the percentage is
|| But not over
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.
You must complete Form 2441 and attach it to your Form 1040. Enter the credit on line 46 of your Form 1040. An example of a filled-in
Form 2441 is at the end of this chapter.
You must complete Schedule 2 (Form 1040A) and attach it to your Form 1040A. Enter the credit on line 29 of your Form 1040A.
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
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 taxes.
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.
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.
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 child-care center while she works. The benefits from this child-care 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 box 10 of her Form
W-2, 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. She pays her neighbor $2,400 for this care.
Joan figures her credit on Form 2441 as follows.
||Work-related expenses Joan paid
||Dollar limit (2 or more qualified individuals)
||Minus: Dependent care benefits excluded from Joan's income
||Reduced dollar limit
||Lesser of expenses paid ($2,400) or dollar limit ($1,800)
||Percentage for AGI of $29,000
||Multiply the amount by the percentage amount on line 6
||Enter the amount from Form 1040, line 44
||Enter any amount from Form 1040, line 45
||Subtract line 9 from line 8
||Credit (Enter the smaller of line 7 or line 10)
Form 2441,Forms: 2441Page 1
Form 2441, Page 2
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