Publication 503
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Important Change for 2002New definition of earned income. Earned income no longer includes employee compensation that is nontaxable. See Earned Income Test. Important Changes for 2003Beginning in 2003, the following changes will be made to the child and dependent care credit. Credit percentage. The credit can be as much as 35% (increased from 30% in 2002) of your qualified expenses. Income that qualifies for highest percentage. The maximum adjusted gross income amount that qualifies for the highest percentage (35% in 2003) will increase to $15,000. Dollar limit. The dollar limit on the amount of qualifying expenses will increase to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. Earned income amount for nonworking spouse. The amount of earned income your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned will increase. This amount will increase to $250 a month if there is one qualifying person and to $500 a month if there are two or more qualifying persons. Important RemindersTaxpayer identification number needed for each qualifying person. You must include on line 2 of Form 2441, Child and Dependent Care Expenses, or Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers, the name and taxpayer identification number (generally the social security number) of each qualifying person. See Taxpayer identification number under Qualifying Person Test, later. You may have to pay employment taxes. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. See Employment Taxes for Household Employers, later. Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. IntroductionThis publication explains the tests you must meet to claim the credit for child and dependent care expenses. It explains how to figure and claim the credit. You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. The credit can be up to 30% of your expenses. To qualify, you must pay these expenses so you can work or look for work. This publication also discusses some of the employment tax rules for household employers. Dependent care benefits. If you received any dependent care benefits from your employer during the year, you may be able to exclude from your income all or part of them. You must complete Part III of Form 2441 or Schedule 2 (Form 1040A) before you can figure the amount of your credit. See Employer-Provided Dependent Care Benefits under How To Figure the Credit, later. Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions. You can e-mail us while visiting our web site at www.irs.gov. You can write to us at the following address:
We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Useful ItemsYou may want to see: Publication
Form (and Instructions)
See How To Get Tax Help, near the end of this publication, for information about getting these publications and forms. Tests To Claim the Credit
figure a. can you claim the credit To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following tests.
These tests are presented in Figure A and are also explained in detail in this publication. Qualifying Person TestYour child and dependent care expenses must be for the care of one or more qualifying persons. A qualifying person is:
If you are divorced or separated, see Child of Divorced or Separated Parents, later, to determine which parent may treat the child as a qualifying person. For information on claiming an exemption, see Publication 501. Physically or mentally not able to care for oneself. Persons who cannot dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves. Person qualifying for part of year. You determine a person's qualifying status each day. For example, if the person for whom you pay child and dependent care expenses no longer qualifies on September 16, count only those expenses through September 15. Also see Dollar Limit under How To Figure the Credit, later. Taxpayer identification number. You must include on your return the name and taxpayer identification number (generally the social security number) of the qualifying person(s). If the correct information is not shown, the credit may be reduced or disallowed. Individual taxpayer identification number (ITIN) for aliens. If your qualifying person is a nonresident or resident alien who does not have and cannot get a social security number (SSN), use that person's ITIN. The ITIN is entered wherever an SSN is requested on a tax return. If the alien does not have an ITIN, he or she must apply for one on Form W-7, Application for IRS Individual Taxpayer Identification Number. An ITIN is for tax use only. It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U.S. law. Adoption taxpayer identification number (ATIN). If your qualifying person is a child who was placed in your home for adoption and for whom you do not have an SSN, you must get an ATIN for the child. File Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions.
figure b. is a child of divorced or separated parents a qualifying person? Child of Divorced or
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Cost of Keeping Up Joe's Home That He Must Pay | ||||
1) | Cost of keeping up the home for the full year | $ | 6,600 | |
2) | Divided by the number of months in a year | ÷ 12 | ||
3) | Monthly cost of keeping up the home | $ | 550 | |
4) | Multiplied by number of months the qualifying person lived in the home | × 7 | ||
5) | Cost of keeping up the home while the qualifying person lived there | $ | 3,850 | |
6) | Multiplied by one-half | × .50 | ||
7) | Half the cost of keeping up the home while the qualifying person lived there | $ | 1,925 |
To claim the credit, you (and your spouse if you are married) must have earned income during the year.
Earned income. Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages.
Nontaxable employee compensation not included. When figuring your earned income for the child and dependent care credit, do not count nontaxable employee compensation such as meals and lodging furnished for the convenience of the employer, voluntary salary deferrals, military basic quarters and subsistence allowances and in-kind quarters and subsistence, and military pay earned in a combat zone.
Members of certain religious faiths opposed to social security. This section is for persons who are members of certain religious faiths that are opposed to participation in Social Security Act programs and have an IRS-approved form that exempts certain income from social security and Medicare taxes. These forms are:
Each form is discussed in this section in terms of what is or is not earned income for purposes of the child and dependent care credit. For information on the use of these forms, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Form 4361. Whether or not you have an approved Form 4361, amounts you received for performing ministerial duties as an employee are earned income. This includes wages, salaries, tips, and other employee compensation (but does not include any employee compensation that is nontaxable, such as a housing allowance).
However, amounts you received for ministerial duties, but not as an employee, are not net earnings from self-employment for purposes of the child and dependent care credit. Examples include fees for performing marriages and honoraria for delivering speeches. Any income or loss from these activities is not taken into account in figuring earned income.
Any amount you received for work that is not related to your ministerial duties is earned income.
Form 4029. Whether or not you have an approved Form 4029, all wages, salaries, tips, and other employee compensation are earned income. However, any employee compensation that is nontaxable is not considered earned income.
In addition, amounts you received as a self-employed individual are not net earnings from self-employment for purposes of the child and dependent care credit, and are not taken into account in figuring earned income.
What is not earned income? Earned income does not include pensions or annuities, social security payments, workers' compensation, interest, dividends, or unemployment compensation. It also does not include scholarship or fellowship grants, except amounts paid to you (and reported on Form W-2) for teaching, research, or other services.
Rule for student-spouse or spouse not able to care for self. Your spouse is treated as having earned income for any month that he or she is:
Figure the earned income of the nonworking spouse, described under (1) or (2) above, as shown under Earned Income Limit under How To Figure the Credit, later.
This rule applies to only one spouse for any one month. If, in the same month, both you and your spouse do not work and are either full-time students or physically or mentally not able to care for yourselves, only one of you can be treated as having earned income in that month.
Full-time student. You are a full-time student if you are enrolled at and attend a school for the number of hours or classes that the school considers full time. You must have been a student for some part of each of 5 calendar months during the year. (The months need not be consecutive.) If you attend school only at night, you are not a full-time student. However, as part of your full-time course of study, you may attend some night classes.
School. The term school includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. It does not include on-the-job training courses, correspondence schools, and night schools.
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