| Publication 17, Your Federal Income Tax |
2006 Tax Year |
32.
Child and Dependent Care Credit
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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.
This chapter discusses the credit for child and dependent care expenses and covers the following topics.
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Tests you must meet to claim the credit.
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How to figure the credit.
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How to claim the credit.
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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 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
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501
Exemptions, Standard Deduction, and Filing Information
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503
Child and Dependent Care Expenses
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926
Household Employer's Tax Guide
Form (and Instructions)
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2441
Child and Dependent Care Expenses
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Schedule 2 (Form 1040A)
Child and Dependent Care Expenses for Form 1040A Filers
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Schedule H (Form 1040)
Household Employment Taxes
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W-7
Application for IRS Individual Taxpayer Identification Number
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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.
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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.)
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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.)
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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.)
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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.)
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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.)
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You must identify the care provider on your tax return. (See Provider Identification Test, later.)
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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.
Figure 32-A. Can You Claim the Credit? Summary: This flowchart is used to determine if a taxpayer can claim the Child and Dependent Care Credit.Start. This is the starting of the flowchart.Decision (1). Was the care for one or more qualifying persons?
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IF Yes Continue To Decision (2)
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IF No Continue To Process (a)
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Decision (2). Did you (see Footnote 1) have earned income during the year?Footnote 1: This also applies to your spouse, unless your spouse
was disabled or a full-time student.
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IF Yes Continue To Decision (3)
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IF No Continue To Process (a)
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Decision (3). Did you pay the expenses to allow you (see Footnote 1) to work or look for work?Footnote 1: This also applies to your spouse,
unless your spouse was disabled or a full-time student.
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IF Yes Continue To Decision (4)
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IF No Continue To Process (a)
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Decision (4). Were your payments made to someone you or your spouse could claim as a dependent?
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IF Yes Continue To Process (a)
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IF No Continue To Decision (5)
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Decision (5). Were your payments made to your spouse or to the parent of your child who is your qualifying person?
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IF Yes Continue To Process (a)
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IF No Continue To Decision (6)
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Decision (6). Were your payments made to your child who was under the age of 19 at the end of the year?
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IF Yes Continue To Process (a)
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IF No Continue To Decision (7)
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Decision (7). Are you single?
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IF Yes Continue To Decision (10)
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IF No Continue To Decision (8)
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Decision (8). Are you filing a joint return?
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IF Yes Continue To Decision (10)
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IF No Continue To Decision (9)
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Decision (9). Do you meet the requirements to be considered unmarried?
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IF Yes Continue To Decision (10)
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IF No Continue To Process (a)
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Decision (10). Do you know the care provider's name, address, and identifying number?
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IF Yes Continue To Decision (12)
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IF No Continue To Decision (11)
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Decision (11). Did you make a reasonable effort to get this information? (See Due diligence.)
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IF Yes Continue To Decision (12)
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IF No Continue To Process (a)
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Decision (12). Did you have only one qualifying child and exclude or deduct at least $3,000 of dependent care benefits?
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IF Yes Continue To Process (a)
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IF No Continue To Process (b)
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Process (a). You CANNOT claim the child and dependent care credit.Footnote 2: If you had expenses that met the requirements for 2004, except
that you did not pay them until 2005, you may be able to claim
those expenses in 2005. See Expenses not paid until the following year under How To Figure the Credit.
Process (b). You CAN claim the child and dependent care credit. Fill out Form 2441 or Schedule 2 (Form 1040A).
End. This is the ending of the flowchart.
Your child and dependent care expenses must be for the care of one or more qualifying persons.
A qualifying person is:
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Your qualifying child who is your dependent and who was under age 13 when the care was provided (but see Note below),
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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
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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:
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Was your dependent, or
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Would have been your dependent except that (i) he or she received gross income of $3,300 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 2006 return.
Note.
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:
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The child was under age 13 or was physically or mentally not able to care for himself or herself, and
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You were the child's custodial parent (the parent with whom the child lived for the greater part of 2005).
The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the
child as a dependent under the
special rule for a child of divorced or separated parents.
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:
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A full-time student, or
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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.
If you enrolled in school before September 23, 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 Rita.
If you enrolled in school before October 23, 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 Wilma.
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 school offering courses only through
the Internet.
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.
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 babysitter 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:
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A dependent for whom you (or your spouse if you are married) can claim an exemption,
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Your child who was under age 19 at the end of the year, even if he or she is not your dependent,
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Your spouse, or
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The parent of your qualifying child who is your qualifying person and is under
age 13.
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.
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You file a separate return.
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Your home is the home of a qualifying person for more than half the year.
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You pay more than half the cost of keeping up your home for the year.
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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:
-
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, 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:
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A copy of the provider's social security card,
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A copy of the provider's driver's license (in a state where the license includes the social security number),
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A copy of the provider's completed Form W-4 if he or she is your household employee,
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A copy of the statement furnished by your employer if the provider is your employer's dependent care plan, or
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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. 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.
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 2006 work-related expenses, count only those you paid by December 31, 2006.
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 2005 expenses that you paid in 2006 as work-related expenses for 2006. You may be able to claim an additional
credit for them on your
2006 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 2006 that you did not pay until 2007, you cannot count them when figuring your 2006 credit. You may
be able to claim a
credit for them on your 2007 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.
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 paid 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 daycare facility provided or sponsored by your employer.
Your salary may have been reduced to pay for these benefits. If you received benefits as an employee, 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
N. 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. To claim the exclusion, you must complete Part III of either Form 2441 or
Schedule 2 (Form 1040A).
You cannot use Form 1040EZ.
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. Instead, you would get a deduction on Form 1040, Schedule C, line 14;
Schedule E, line 18 or 28;
or Schedule F, line 17. To claim the deduction, you must use Form 2441.
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.
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.
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.
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.
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 29 through 33 of Form 2441 or lines 23 through 27 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.
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%
|
|
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.
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.
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.
Form 2441 Child and Dependent Care Expenses. Summary: This is a sample Form 2441 (2005), Page 1 pertaining to the example explained in the text, with additional line item
information not
listed in the text.
|
Name(s) shown on Form 1040 field contains Joan Thomas
|
|
Your social security number field contains 559-00-3436
|
|
Under Part I: Persons or Organizations Who Provided the Care:
|
|
1(a) Care provider's name field contains Pat Green and ACME Computers
|
|
1(b) Address (number, street, apartment number, city, state, and ZIP code) field contains 12 Ash Avenue, Hometown, Texas 75240
and (See
W-2)
|
|
1(c) Identifying number (Social Security Number or Employer Identification Number) field contains 240-00-3811
|
|
1(d) Amount paid (see instructions) field contains 2,400
|
|
|
Under Part II: Credit for Child and Dependent Care Expenses:
|
|
2(a) Qualifying person's name: First field contains Seth and Susan
|
|
2(a) Qualifying person's name: Last field contains Thomas and Thomas
|
|
2(b) Qualifying person's social security number field contains 559-00-1234 and 559-00-5678
|
|
2(c) Qualified expenses you incurred and paid in 2005 for the person listed in column (a) field contains 2,400
|
|
3. Add the amounts in column (c) of line 2. Do not enter more than $3,000 for one qualifying person or $6,000 for two or more
persons. If you
completed Part III, enter the amount from line 26 field contains 2,400
|
|
4. Enter your earned income field contains 29,000
|
|
5. If married filing jointly, enter your spouse's earned income (if your spouse was a student or was disabled, see the instructions);
all
others, enter the amount from line 4 field contains 29,000
|
|
6. Enter the smallest of line 3, 4, or 5 field contains 2,400
|
|
7. Enter the amount from Form 1040, line 38 field contains 29,000
|
|
8. Enter on line 8 the decimal point shown below that applies to the amount on line 7 field contains .28
|
|
9. Multiply line 6 by the decimal amount on line 8. If you paid 2004 expenses in 2005, see the instructions field contains
672
|
|
10. Enter the amount from Form 1040, line 46, minus any amount on Form 1040, line 47 field contains 1,296
|
|
11. Credit for child and dependent care expenses. Enter the smaller of line 9 or line 10 here and on Form 1040, line 48 field
contains
672
|
|
Form 2441 Child and Dependent Care Expenses--Page 2. Summary: This is an example of Form 2441 (2005), page 2, as pertains to the text. The completed line items are:
|
Under
“Part III: Dependent Care Benefits”:
|
|
“12. Enter the total amount of dependent care benefits you received for 2005. This amount should be shown in box 10 of your
W-2 form(s). Do not
include amounts that were reported to you as wages in box 1 of Form(s) W-2” field contains 3,000
|
|
“14. Subtract line 13 from line 12” field contains 3,000
|
|
“15. Enter the total amount of qualified expenses incurred in 2005 for the care of the qualifying person(s)” field contains
5,400
|
|
“16. Enter the smaller of line 14 or 15” field contains 3,000
|
|
“17. Enter your earned income” field contains 29,000
|
|
“18. Enter the amount shown below that applies to you. If married filing jointly, enter your spouse's earned income (if your
spouse was a
student or was disabled, see the instructions for line 5); If married filing separately, see the instructions for the amount
to enter; All others,
enter the amount from line 17” field contains 29,000
|
|
“19. Enter the smallest of line 16, 17, or 18” field contains 3,000
|
|
“20. Enter the amount from line 12 that you received from your sole proprietorship or partnership. If you did not receive any
such amounts,
enter -0-.” field contains -0-.
|
|
“21. Subtract line 20 from line 14..” field contains 3,000.
|
|
“22. Enter $5,000 ($2,500 if married filing separately and you were required to enter your spouse's earned income on line 18)” field
contains 5,000.
|
|
“23. Deductible benefits. Enter the smallest of line 19, 20, or 22. Also, include this amount on the appropriate line(s) of
your return (see
the instructions). Field contains -0-.”
|
|
“24. Enter the smaller of line 19 or 22.” Field contains 3,000.
|
|
“25. Enter the amount from line 23.” Field contains -0-.
|
|
“26. Excluded benefits. Subtract line 25 from line 24. If zero or less, enter -0-.” Field contains 3,000.
|
|
“27. Taxable benefits. Subtract line 26 from line 21. If zero or less, enter -0-. Also, include this amount on Form 1040, line
7. On the dotted
line next to line 7, enter DCB” Field contains -0-.
|
|
|
Under
“To claim the child and dependent care credit, complete lines 28-32 below”:
|
|
“28. Enter $3,000 ($6,000 if two or more qualifying persons)” field contains 6,000
|
|
“29. Add lines 23 and 26” field contains 3,000
|
|
“30. Subtract line 29 from line 28. If zero or less, stop. You cannot take the credit. Exception. If you paid 2004 expenses
in 2005, see the
instructions for line 9” field contains 3,000
|
|
“31. Complete line 2 on the front of this form. Do not include in column (c) any benefits shown on line 29 above. Then, add
the amounts in
column (c) and enter the total here” field contains 2,400
|
|
“32. Enter the smaller of line 30 or 31. Also, enter this amount on line 3 on the front of this form and complete lines 4-11” field
contains 2,400
|
|
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