Table of Contents
New credit limit applies. The credit for child and dependent care expenses is no longer allowed against the alternative minimum tax (AMT). See Limit on credit for more information. At the time this publication went to print, Congress was considering legislation that would allow the credit against the AMT. To find out if the legislation was enacted, and for more details, see the Instructions for Form 2441.
New definition of earned income. When you figure your credit for child and dependent care expenses, your earned income no longer includes employee compensation that is nontaxable. However, you can elect to include any nontaxable combat pay in earned income to figure your credit. See Earned Income Test.
Part-time work and temporary absences from work. You may be able to figure your credit using expenses for care while you were temporarily absent from work or working part-time. See Working or Looking for Work.
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.
-
Tests you must meet to claim the credit.
-
How to figure the credit.
-
How to claim the credit.
-
Employment taxes you may have to pay as a household employer.
You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. The credit can be up to 35% of your expenses. To qualify, you must pay these expenses so you can work or look for work.
This credit should not be confused with the child tax credit discussed in chapter 34.
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
To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following tests.
-
The care must be for one or more qualifying persons who are identified on the form you use to claim the credit. (See Qualifying Person Test. )
-
You (and your spouse if you are married) must have earned income during the year. (However, see Rule for student-spouse or spouse not able to care for self under Earned Income Test, later.)
-
You must pay child and dependent care expenses so you (and your spouse if you are married) can work or look for work. (See Work-Related Expense Test , later.)
-
You must make payments for child and dependent care to someone you (and 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. You cannot make payments to:
-
Your spouse, or
-
The parent of your qualifying child who is your qualifying person and under age 13.
(See Payments to Relatives or Dependents under Work-Related Expense Test, later.)
-
-
Your filing status must be single, head of household, qualifying widow(er) with dependent child, or married filing jointly. You must file a joint return if you are married, unless an exception applies to you. (See Joint Return Test, later.)
-
You must identify the care provider on your tax return. (See Provider Identification Test, later.)
-
If you exclude or deduct dependent care benefits provided by a dependent care benefits plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the amount you can exclude or deduct is limited to $5,000. See Reduced Dollar Limit under How To Figure the Credit, later.)
These tests are presented in Figure 32-A and are also explained in detail in this chapter.
Your child and dependent care expenses must be for the care of one or more qualifying persons.
A qualifying person is:
-
Your qualifying child who is your dependent and who was under age 13 when the care was provided (but see Note later),
-
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
-
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:
-
Was your dependent, or
-
Would have been your dependent except that:
-
He or she received gross income of $3,400 or more,
-
He or she filed a joint return, or
-
You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2007 return.
-
-
Note.
If you are divorced or separated, see Child of divorced or separated parents or parents living apart, later, to determine which parent may treat the child as a qualifying person.
-
The child was under age 13 or was physically or mentally not able to care for himself or herself,
-
The child received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year,
-
The child was in the custody of one or both parents for more than half the year, and
-
You were the child's custodial parent (the parent with whom the child lived for the greater part of 2007).
To claim the credit, you (and your spouse if you are married) must have earned income during the year.
-
Pensions and annuities,
-
Social security and railroad retirement benefits,
-
Workers' compensation,
-
Interest and dividends,
-
Unemployment compensation,
-
Scholarship or fellowship grants, except for those reported on a Form W-2 and paid to you for teaching or other services,
-
Nontaxable workfare payments,
-
Income of nonresident aliens that is not effectively connected with a U.S. trade or business, or
-
Any amount received for work while an inmate in a penal institution.
-
A full-time student, or
-
Physically or mentally not able to care for himself or herself. (Your spouse also must live with you for more than half the year.)
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.
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.
An expense is not considered work-related merely because you had it while you were working. The purpose of the expense must be to allow you to work. Whether your expenses allow you to work or look for work depends on the facts.
Example 1.
The cost of a babysitter while you and your spouse go out to eat is not normally a work-related expense.
Example 2.
You work during the day. Your spouse works at night and sleeps during the day. You pay for care of your 5-year-old child during the hours when you are working and your spouse is sleeping. Your expenses are considered work-related.
Example.
You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. You become ill and miss 4 months of work but receive sick pay. You continue to pay the nanny to care for the children while you are ill. Your absence is not a short, temporary absence, and your expenses are not considered work-related.
Example 1.
You work 3 days a week. While you work, your 6-year-old child attends a dependent care center, which complies with all state and local regulations. You can pay the center $150 for any 3 days a week or $250 for 5 days a week. Your child attends the center 5 days a week. Your work-related expenses are limited to $150 a week.
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 care. The cost of a paid care provider may be an expense for the care of a qualifying person even if another care provider is available at no cost.
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.
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. The lunch and educational activities are incident to the childcare, and their cost cannot be separated from the cost of care. 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.
You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. However, do not count any amounts you pay to:
-
A dependent for whom you (or your spouse if you are married) can claim an exemption,
-
Your child who was under age 19 at the end of the year, even if he or she is not your dependent,
-
A person who was your spouse any time during the year, or
-
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.
-
You file a separate return.
-
Your home is the home of a qualifying person for more than half the year.
-
You pay more than half the cost of keeping up your home for the year.
-
Your spouse does not live in your home for the last 6 months of the year.
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.
-
Name,
-
Address, and
-
Taxpayer identification number.
-
A copy of the provider's social security card,
-
A copy of the provider's driver's license (if the license includes the social security number),
-
A copy of the provider's completed Form W-4 if he or she is your household employee,
-
A copy of the statement furnished by your employer if the provider is your employer's dependent care plan, or
-
A letter or invoice from the provider if it shows the information.
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.
To figure the credit for 2007 work-related expenses, count only those you paid by December 31, 2007.
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.
-
Amounts your employer paid 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 daycare facility provided or sponsored by your employer, and
-
Pre-tax contributions you made under a dependent care flexible spending arrangement.
-
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 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.
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.
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 in Part III of Form 2441 or 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 |
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.
At the time this publication went to print, Congress was considering legislation that would change this limit. That legislation may also affect the line numbers on Form 2441 and Schedule 2 (Form 1040A). To find out if the legislation was enacted and for more details, see the Instructions for Form 2441.
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.
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, the worker 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, and pay the sitter directly, 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.
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 draft Form 2441 is shown at the end of this chapter.
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 44 | $ | 1,098 | |
9) | Enter the amount from Form 6251, line 31 | 0 | ||
10) | Subtract line 9 from line 8 | $ | 1,098 | |
11) | Credit (Enter the smaller of line 7 or line 10) | $ | 672 |
More Online Publications |