Important Change for 2002

New definition of earned income.   Earned income no longer includes employee compensation that is nontaxable. See Earned Income Test.

Important Changes for 2003

Beginning in 2003, the following changes will be made to the child and dependent care credit.

Credit percentage.   The credit can be as much as 35% (increased from 30% in 2002) of your qualified expenses.

Income that qualifies for highest percentage.   The maximum adjusted gross income amount that qualifies for the highest percentage (35% in 2003) will increase to $15,000.

Dollar limit.   The dollar limit on the amount of qualifying expenses will increase to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals.

Earned income amount for nonworking spouse.   The amount of earned income your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned will increase. This amount will increase to $250 a month if there is one qualifying person and to $500 a month if there are two or more qualifying persons.

Important Reminders

Taxpayer identification number needed for each qualifying person.   You must include on line 2 of Form 2441, Child and Dependent Care Expenses, or Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers, 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.

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication explains the tests you must meet to claim the credit for child and dependent care expenses. It explains how to figure and claim the credit.

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 30% of your expenses. To qualify, you must pay these expenses so you can work or look for work.

This publication also discusses some of the employment tax rules for household employers.

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 Employer-Provided Dependent Care Benefits under How To Figure the Credit, later.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 501   Exemptions, Standard Deduction, and Filing Information
• 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-10   Dependent Care Provider's Identification and Certification

See How To Get Tax Help, near the end of this publication, for information about getting these publications and forms.

Tests To Claim the Credit

figure a. can you 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 keep up a home that you live in with the qualifying person or persons. (See Keeping Up a Home Test, later.)
3. 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.)
4. 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.)
5. 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.)
6. 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.
7. You must identify the care provider on your tax return. (See Provider Identification Test, later.)
8. If you exclude dependent care benefits provided by your employer, the amount you exclude must be less than the dollar limit for qualifying expenses (generally, $2,400 if one qualifying person was cared for, or $4,800 if two or more qualifying persons were cared for). (See Reduced Dollar Limit under How To Figure the Credit, later.)

These tests are presented in Figure A and are also explained in detail in this publication.

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 dependent who was under age 13 when the care was provided and for whom you can claim an exemption,
2. Your spouse who was physically or mentally not able to care for himself or herself, or
3. 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 $3,000 or more of gross income).

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.

For information on claiming an exemption, see Publication 501.

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. The ITIN is entered wherever an SSN is requested on a tax return. If the alien does not have an ITIN, he or she must apply for one on Form W-7, Application for IRS Individual Taxpayer Identification Number.

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.

figure b. is a child of divorced or separated parents a qualifying person?

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 an exception may apply if you are divorced or separated. Under the exception, if 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.

This exception applies if all of the following are true.

1. One or both parents had custody of the child for more than half of the year.
2. One or both parents provided more than half of the child's support for the year.
3. Either:
   1. 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
   2. 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 3(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.

You can use Figure B to see whether this exception applies to you. If it applies, only the custodial parent can treat the child as a qualifying person. If the exception does not apply, follow the regular rules for a qualifying person under Qualifying Person Test, earlier.

Example.   You are divorced and have custody of your 8-year-old child. You sign Form 8332 to allow your ex-spouse to claim the exemption. You pay child care 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.

Divorced or separated.   For purposes of determining whether your child is a qualifying person, you are considered divorced or separated if either of the following applies.

1. You are divorced or separated under a decree of divorce or separate maintenance or a written separation agreement.
2. You lived apart from your spouse for all of the last 6 months of the year.

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. If you live in your home with a qualifying person for less than a full year, see Cost determined monthly, later.

Home.   The home you keep must be the main home for both you and the qualifying person. Your home can be the main home even if the qualifying person does not live there all year because of his or her:

1. Birth,
2. Death, or
3. Temporary absence due to:
   1. Sickness,
   2. School,
   3. Business,
   4. Vacation,
   5. Military service, or
   6. Custody agreement.

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.

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.

Public assistance benefits.   Payments you receive from a state that you use to keep up your home are funds provided by the state, not by you. You must provide more than half the cost of keeping up your home from your own funds to claim the credit for child and dependent care expenses.

Families living together.   If you and your family share living space with another family, your family and the other family are treated as separate households. (This rule applies only for purposes of the credit for child and dependent care expenses.) If you provide more than half the cost of running your household, you are keeping up a home.

Cost determined monthly.   If a qualified person lived with you for less than a full year, figure the cost of keeping up your home for that period. To do this, divide your cost for the year by 12 and multiply the result by the number of months the person lived with you. Count any partial month as a full month.

Example.   Joe lives in his home all year, but his son, who is a qualifying person, lives in it only from June 20 to December 31. The cost of keeping up his home for the full year is $6,600. To meet the keeping up a home test, Joe must pay more than half the cost of keeping up the home from June 1 to December 31. He figures half the cost as follows.

Cost of Keeping Up Joe's Home That He Must Pay
1)	Cost of keeping up the home for the full year	$6,600
2)	Divided by the number of months in a year	÷ 12
3)	Monthly cost of keeping up the home	$550
4)	Multiplied by number of months the qualifying  person lived in the home	× 7
5)	Cost of keeping up the home while the   qualifying person lived there	$3,850
6)	Multiplied by one-half	× .50
7)	Half the cost of keeping up the home while the qualifying person lived there	$1,925

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.

Nontaxable employee compensation not included.   When figuring your earned income for the child and dependent care credit, do not count nontaxable employee compensation such as 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.   This section is for 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. These forms are:

• Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners,
• Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits, for use by members of recognized religious groups.

Each form is discussed in this section in terms of what is or is not earned income for purposes of the child and dependent care credit. For information on the use of these forms, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Form 4361.   Whether or not you have an approved Form 4361, amounts you received for performing ministerial duties as an employee are earned income. This includes wages, salaries, tips, and other employee compensation (but does not include any employee compensation that is nontaxable, such as a housing allowance).

However, amounts you received for ministerial duties, but not as an employee, are not net earnings from self-employment for purposes of the child and dependent care credit. Examples include fees for performing marriages and honoraria for delivering speeches. Any income or loss from these activities is not taken into account in figuring earned income.

Any amount you received for work that is not related to your ministerial duties is earned income.

Form 4029.   Whether or not you have an approved Form 4029, all wages, salaries, tips, and other employee compensation are earned income. However, any employee compensation that is nontaxable is not considered earned income.

In addition, amounts you received as a self-employed individual are not net earnings from self-employment for purposes of the child and dependent care credit, and are not taken into account in figuring earned income.

What is 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.

Figure the earned income of the nonworking spouse, described under (1) or (2) above, as shown under Earned Income Limit under How To Figure the Credit, 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.

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