33. Child and Dependent Care Credit
Important Change for 2002
New definition of earned income. For tax years
after 2001, earned income will no longer include employee compensation that is nontaxable.
Important Reminders
Taxpayer identification number needed for each qualifying person.
You must include on line 2 of Form 2441 or Schedule 2 (Form 1040A) the name and taxpayer
identification number (generally the social security number) of each qualifying person.
See Taxpayer identification number under Qualifying Person Test, later.
You may have to pay employment taxes. If you pay someone to come to
your home and care for your dependent or spouse, you may be a household employer who has
to pay employment taxes. Usually, you are not a household employer if the
person who cares for your dependent or spouse does so at his or her home or place of
business. See Employment Taxes for Household Employers, later.
Introduction
This chapter discusses the credit for child and dependent care expenses
and covers the following topics.
- Tests you must meet to claim the credit.
- How to figure the credit.
- How to claim the credit.
- Employment taxes you may have to pay as a household employer.
You may be able to claim the credit if you pay someone to care for your dependent who
is under age 13 or for your spouse or dependent who is not able to care for himself or
herself. The credit can be up to 30% 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 35.
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.
Useful Items
You may want to see:
Publication
- 501 Exemptions, Standard Deduction, and Filing Information
- 503 Child and Dependent Care Expenses
- 926 Household Employer's Tax Guide
Form (and Instructions)
- 2441 Child and Dependent Care Expenses
- Schedule 2 (Form 1040A) Child and Dependent Care Expenses for Form 1040A
Filers
- Schedule H (Form 1040) Household Employment Taxes
- W-7 Application for IRS Individual Taxpayer Identification Number
- W-10 Dependent Care Provider's Identification and Certification
Tests To Claim
the Credit
To be able to claim the credit for child and dependent care expenses, you must file
Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following
tests.
- 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 keep up a home that you live in with the
qualifying person or persons. (See Keeping Up a Home Test, later.)
- 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 (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.)
- 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 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 33-A and are also explained in detail in
this chapter.
Figure 33-A Can You Claim the Credit?
Qualifying Person Test
Your child and dependent care expenses must be for the care of one or more qualifying
persons.
A qualifying person is:
- Your dependent who was under age 13 when the care was provided and for whom you can
claim an exemption,
- Your spouse who was physically or mentally not able to care for himself or herself, or
- 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.
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, file Form W-7 with the IRS. 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
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.
Figure 33-B. Is a Child of Divorced or Separated Parents a Qualifying Person?
This exception applies if all of the following are true.
- One or both parents had custody of the child for more than half of the year.
- One or both parents provided more than half of the child's support for the year.
- Either -
- 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
- 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 33-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 take 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.
- You are divorced or separated under a decree of divorce or separate maintenance or a
written separation agreement.
- 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.
Home. The home you keep up must be the main home for both you and
the qualifying person. Your home can be the qualifying person's main home even if he or
she does not live there all year because of his or her:
- Birth,
- Death, or
- Temporary absence due to:
- Sickness,
- School,
- Business,
- Vacation,
- Military service, or
- Custody agreement.
Costs of keeping up 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.
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 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:
- A full-time student, or
- 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
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 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.
Work-Related
Expense Test
Child and dependent care expenses must be work related to qualify for the credit.
Expenses are considered work related only if both of the following are true.
- They allow you (and your spouse if you are married) to work or look for work.
- They are for a qualifying person's care.
Working or Looking for Work
To be work related, your expenses must allow you to work or look for work. If you are
married, generally both you and your spouse must work or look for work. Your spouse is
treated as working during any month he or she is a full-time student or is physically or
mentally not able to care for himself or herself.
Your work can be for others or in your own business or partnership. It can be either
full time or part time.
Work also includes actively looking for work. However, if you do not find a job and
have no earned income for the year, you cannot take this credit. See Earned Income
Test, earlier.
Whether your expenses allow you to work or look for work depends on the facts. For
example, the cost of a sitter while you and your spouse go out to eat is not normally a
work-related expense.
An expense is not considered work related merely because you had it while you were
working. The purpose of the expense must be to enable you to work.
Volunteer work. For this
purpose, you are not considered to be working if you do unpaid volunteer work or volunteer
work for a nominal salary.
Work for part of year. If you work or actively look for work during
only part of the period covered by the expenses, then you must figure your expenses for
each day. For example, if you work all year and pay care expenses of $200 a month ($2,400
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 $200 a month, your
work-related expenses are limited to $500 (21/ months × $200).
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 to attend first grade 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 child-care
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.
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
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, or
- 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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