Publication 17
Your Federal Income Tax

For Individuals

For use in preparing 2002 Returns

Joint Return Test

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.

1. You file a separate return.
2. Your home is the home of a qualifying person for more than half the year.
3. You pay more than half the cost of keeping up your home for the year.
4. Your spouse does not live in your home for the last 6 months of the year.

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:

1. Name,
2. Address, and
3. 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, write 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:

1. A copy of the provider's social security card,
2. A copy of the provider's driver's license (in a state where the license includes the social security number),
3. A copy of the provider's completed Form W-4 if he or she is your household employee,
4. A copy of the statement furnished by your employer if the provider is your employer's dependent care plan, or
5. 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. Write 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.

How To Figure
the Credit

Your credit is a percentage of your work-related expenses. Your expenses are subject to the earned income limit and the dollar limit. The percentage is based on your adjusted gross income.

Figuring Total
Work-Related Expenses

To figure the credit for 2002 work-related expenses, count only those you paid by December 31, 2002.

Expenses prepaid in an earlier year.   If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Claim the expenses for the later year as if they were actually paid in that later year.

Expenses not paid until the following year.   Do not count 2001 expenses that you paid in 2002 as work-related expenses for 2002. You may be able to claim an additional credit for them on your 2002 return, but you must figure it separately. See Payments for previous year's expenses under Amount of Credit in Publication 503.

If you had expenses in 2002 that you did not pay until 2003, you cannot count them when figuring your 2002 credit. You may be able to claim a credit for them on your 2003 return.

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.

Employer-Provided Dependent
Care Benefits

Dependent care benefits include:

1. Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and
2. The fair market value of care in a day-care facility provided or sponsored by your employer.

Your salary may have been reduced to pay for these benefits. If you received benefits, they should be shown on your W-2 form. See Statement for employee, later.

Exclusion.   If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Your employer can tell you whether your benefit plan qualifies. If it does, you must complete Part III of either Form 2441 or Schedule 2 (Form 1040A) to claim the exclusion even if you cannot take the credit. You cannot use Form 1040EZ.

The amount you can exclude is limited to the smallest of:

1. The total amount of dependent care benefits you received during the year,
2. The total amount of qualified expenses you incurred during the year,
3. Your earned income,
4. Your spouse's earned income, or
5. $5,000 ($2,500 if married filing separately).

Statement for employee.   Your employer must give you a Form W-2 (or similar statement), showing in box 10 the total amount of dependent care benefits provided to you during the year under a qualified plan. Your employer will also include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2.

Forfeitures.   Forfeitures are amounts credited to your dependent care benefit account (flexible spending account) and included in the amount shown in box 10 of your Form W-2, but not received because you did not incur the expense. When figuring your exclusion, subtract any forfeitures from the total dependent care benefits reported by your employer. To do this, enter the forfeited amount on line 13 of Form 2441 or Schedule 2 (Form 1040A).

Forfeitures do not include amounts that you expect to receive in the future.

Effect of exclusion.   If you exclude dependent care benefits from your income, the amount of the excluded benefits:

1. Is not included in your work-related expenses, and
2. Reduces the dollar limit, discussed later.

Earned Income Limit

The amount of work-related expenses you use to figure your credit cannot be more than:

1. Your earned income for the year if you are single at the end of the year, or
2. 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 $200 if there is one qualifying person in your home, or at least $400 if there are two or more.

Spouse works.   If your spouse works during that month, use the higher of $200 (or $400) or his or her actual earned income for that month.

Spouse qualifies for part of month.   If your spouse is a full-time student or not able to care for himself or herself for only part of a month, the full $200 (or $400) still applies for that month.

Both spouses qualify.   If, in the same month, both you and your spouse are either full-time students or not able to care for yourselves, only one spouse can be considered to have this earned income of $200 (or $400) for that month.

Dollar Limit

There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $2,400 for one qualifying person, or $4,800 for two or more qualifying persons.

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 $2,400 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Use $4,800 if you paid work-related expenses for the care of more than one qualifying person at any time during the year.

Reduced Dollar Limit

If you received dependent care benefits from your employer that you exclude from your income, you must subtract that amount from the dollar limit that applies to you. Your reduced dollar limit is figured on lines 20 through 24 of Form 2441 or Schedule 2 (Form 1040A). See Employer-Provided Dependent Care Benefits, earlier, for information on excluding these benefits.

Example.   George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $1,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. His employer pays an additional $1,000 under a dependent care benefit plan. This $1,000 is excluded from George's income.