If you paid someone to come to your home to care for your child or other dependent, or you took them to a daycare facility so you could work or look for work, you may be able to take the credit for child and dependent care expenses on your U.S. federal income tax return. And, if you received dependent care benefits from your employer, you may be able to exclude them from your taxable income.
The credit for child and dependent care expenses is intended to help those who have a child or other dependent person to care for, and who must pay someone else to provide this care while they are working or looking for work. This credit should not be confused with the child tax credit. These are two different credits, with different qualifying criteria and different tax benefits. Taking one of these credits does not prevent you from taking the other.
You may be able to take the credit for child and dependent care expenses if you paid someone to care for your child under age 13 or your dependent or spouse who could not care for himself or herself. The credit can be up to 35% of your qualified expenses, and if you received any dependent care benefits from your employer, you may be able to exclude all or part of them. These dependent care benefits are reported in box 10 of Form W-2.
Tests to Qualify
All of the following tests must be met in order to claim the credit for child and dependent care expenses or the exclusion of dependent care benefits:
The care must be for your child under age 13, or your dependent or spouse who is physically or mentally unable to care for himself or herself. This person is called a qualifying person for purposes of this tax credit, and the tests to meet the criteria as a qualifying person are described below.
You (and your spouse if you are married) must keep up a home that you live in with the qualifying person(s).
You (and your spouse) must have earned income. But there is an exception if your spouse is a student or is unable to care for himself or herself.
You must have paid child and dependent care expenses so that you (and your spouse) could work or look for work. If you did not find a job and have no earned income, you cannot take the credit or exclusion.
The person you pay to provide child and dependent care services must not be someone you or your spouse could claim as a dependent on your tax return. You can pay your child to provide these services, but in this case your child must have been age 19 or older at the end of the year, and not claimed as your dependent.
Your filing status cannot be married filing separately, with certain exceptions. Generally, married couples must file a joint return to be eligible for the credit. But 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. (See “Children of Divorced or Separated Parents” below).
You must identify the care provider on your tax return, with the person’s name, address, and taxpayer identification number (Social Security number). You can use Form W-10 to request the information from a care provider if you do not have it.
If you are excluding dependent care benefits provided by your employer, the amount you exclude must be less than the dollar limit for qualifying expenses.
Qualifying Person Test
As mentioned above in number 1 under the Tests to Qualify, the person being cared for must be either:
Your child under age 13, who you can claim as a dependent on your tax return (see “Children of Divorced or Separated Parents” below) , or
Your spouse who was not able to care for himself or herself, or
A person you can claim as a dependent on your tax return, who is unable to care for himself or herself.
Persons who are considered physically or mentally unable to care for themselves include those who are unable to dress, clean or feed themselves, or who need constant attention to prevent them from injuring themselves or others.
If the person receiving the care qualifies for only part of the year, you can take the credit only for the days the person qualifies. For example, if the qualifying person is your child who turned 13 during the year, you can take the credit only for the portion of the year until your child reached age 13.
Identification Numbers
If your qualifying person is a non-resident or resident alien and cannot get a Social Security number, your should request an Individual Taxpayer Identification Number (ITIN) from the Internal Revenue Service (IRS) by filing Form W-7, Application for IRS Individual Tax Identification Number. An ITIN is only for tax purposes – it does not entitle the person to Social Security benefits or change the person’s employment or immigration status under U.S. law. If your child is adopted and you do not have a Social Security number, you can request an Adoption Taxpayer Identification Number (ATIN) by filing Form W-7A.
Child of Divorced or Separated Parents
If you were divorced, legally separated, or lived apart from your spouse during the last six months of the year, you may be able to take the credit or the exclusion even if you cannot claim your child as your dependent. If your child is not your dependent, he or she can still be a qualifying person, but only if all five of the following apply:
You are divorced or separated under a decree of divorce or separate maintenance, or a written separation agreement, or you lived apart from the other parent during the last six months of the year.
One or both parents had custody of the child for more than half the year.
One or both parents provided over half the child’s support.
The child was under age 13 or was physically or mentally unable to take care of himself or herself.
The custodial parent agreed not to claim the exemption for the child. This is done by signing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or a similar statement. Or, the non-custodial parent provided more than $600 for the child’s support and can claim the exemption under a pre-1985 decree of divorce or separate maintenance, or written agreement.
If you meet all of the above tests (that is, the exception applies) you can treat your child as a qualifying person if you have custody, even if you cannot claim the exemption for your child. For these purposes, you are considered to be the custodial parent if you have custody of the child longer than the other parent has custody. If you are the non-custodial parent, the child is not considered a qualifying person for you, even if you can claim the child as a dependent on your tax return.
Keeping Up a Home
Number 2 under the Tests to Qualify states that you must keep up a home that you live in with the child or dependent person. You are considered to be keeping up a home if you pay more than half the cost of running it. The home must be the main home for you and your qualifying person, and it will still be the main home even if there are temporary absences because of sickness, school, business, vacation, military service, or a custody agreement (visitation).
The costs of keeping up a home include rent, or property taxes and mortgage interest if you own the home, utilities, home repairs, insurance, and food you eat at home. Costs of keeping up a home do not include clothing, education, medical expenses, vacations, life insurance, transportation, or the principal portion of your mortgage payment, if you own the home.
If your child or other qualifying person did not live in your home all year, you will need to determine if you paid more than half the cost of running the home while the qualifying person lived with you. You take the total cost of running your home for the whole year, divide this by 12 to determine the cost per month, and multiply this by the number of months the qualifying person lived with you. If you paid more than half the cost during that period, you meet the test for keeping up a home.
Earned Income Test
Number 3 under the Tests to Qualify indicates that you (and your spouse) must have earned income. Your earned income for this purpose includes wages, salaries, tips, and other employee compensation, and net earnings from self-employment. Earned income does not include pensions, annuities, social security benefits, workers’ compensation, unemployment, interest, dividends, or scholarships.
As indicated above, there is an exception if your spouse is a student or is unable to care for himself or herself. For purposes of meeting the earned income test, your spouse is considered as having earned income (and therefore qualifies) for any month in which he or she is a full-time student, or is physically or mentally unable to care for himself or herself. This exception applies to only one spouse per month. If you were both students, or were unable to care for yourselves, only one of you would be considered to have earned income for that month.
Work-related Expense Test
The fourth test to qualify is that the child and dependent care expenses must have been paid so that you (and your spouse) could work or look for work. If you are married, both you and your spouse must have worked or looked for work. But, just as in the case of the earned income test, there is an exception if your spouse was a student or was unable to care for himself or herself.
Your work can be full-time or part-time, and can be as an employee or self-employed. But if you were not working, and were looking for a job and did not find one, and you had no earned income, you do not qualify for this credit.
If you work or look for work only part of the year, you will need to calculate your expenses per day, and only the child and dependent care expenses that correspond to the period you work or look for work qualify for the credit. You can take your annual or monthly expenses and divide by the corresponding number of days in order to determine your expenses per day.
Expenses for the Care of a Qualifying Person
The main purpose of the expenses must be the well-being and protection of the child or qualifying person. These expenses do not include food, clothing, education, or entertainment. For example, if you take your child to a nursery school that provides preschool childcare service, your expenses qualify. But expenses to attend first grade or a higher grade are considered education expenses and do not qualify as care expenses.
The cost of placing your child in a daycare center, or placing a qualifying person in a dependent care center qualifies as dependent care expense, if the center meets all state and local regulations. Transportation expenses in taking your qualifying person to and from a care center are not included in work-related expenses.
Amounts you pay to have someone come to your home to care for the qualifying person are considered work-related expenses and qualify for the credit, provided the amounts you pay are primarily for caring for the qualifying person, and not for other work. If the person provides other household services in addition to providing care services, you have to divide the expense. But if the time spent performing other services is minimal in comparison to the time spent providing care services, you do not have to divide the expenses.
How To Calculate the Credit
The credit for child and dependent care expenses is calculated as a percentage of your expenses. The expenses are subject to two limits – the earned income limit, and the dollar limit (described below). Once you determine the amount of expenses that qualify, the percentage you use to take the credit will depend on your adjusted gross income.
Determining Work-related Expenses
You generally include the amounts you paid for child or dependent care as expenses in the year you actually paid them. If you receive reimbursement from a state social services agency for child and dependent care expenses, you have to reduce the expenses you paid by the amount you were reimbursed.
Amounts that you receive from your employer’s dependent care benefits plan, and that are excluded from your income, cannot be included in your expenses. These benefits may reduce the dollar limit (described below) for purposes of the credit you are allowed to take. But even if you cannot take the credit, you may be able to exclude or deduct the dependent care benefits you receive. These dependent care benefits include:
Amounts paid to you or directly to your care provider, and
The fair market value of care in a daycare facility provided by or sponsored by your employer.
These benefits should be shown on your Form W-2.
Forfeitures are amounts that are credited to your dependent care benefits account (for example under a flexible spending plan) and that are included in box 10 of your W-2, but that you did not receive because you did not incur the expense. For purposes of the exclusion, these forfeitures are subtracted from the amount your employer reported as dependent care benefits, and which you have to report.
Excluding or Deducting Employer Benefits
The amount of employer-provided benefits that you can exclude or deduct is limited to the smallest of the following amounts:
The amount of dependent care benefits you received,
The total amount of qualified child and dependent care expenses you paid,
Your earned income,
Your spouse’s earned income, or
$5,000 ($2,500 if married filing separately)
There is a special provision for non-taxable combat pay. When you are calculating the amount of dependent care benefits that you can exclude or deduct from income, you may elect to include your non-taxable combat pay in your earned income. This may decrease the amount of employer benefits you can exclude, but it will also increase the earned income limit on your work-related expenses for calculating the credit. You should figure your exclusion and credit both ways, including or excluding combat pay, to see which way gives you the greater tax benefit.
The effect of the exclusion of employer-provided benefits is that you must reduce your qualifying child and dependent care expenses by the amount you exclude or deduct, and your dollar limit is reduced.
Earned Income Limit
Your earned income or your spouse’s earned income is one of the limits for excluding or deducting employer-provided benefits, but earned income is also a limit in determining the amount of work related expenses that qualify for calculating your credit.
Your work-related expenses cannot be more than:
Your earned income if you are single, or
The smaller of your earned income or your spouse’s earned income if you are married.
If you are self-employed, your net earnings are included in your earned income.
For each month or part of a month your spouse was a student or disabled, he or she is considered to have worked and earned income. His or her income for each month is considered to be at least $250 ($500 if there is more than one qualifying person being cared for). If your spouse also worked during part of that month, use the higher of $250 (or $500) or his or her actual earned income in figuring the earned income limit. If, in the same month, both you and your spouse were either students or disabled, only one of you can be treated as having earned income in that month.
Dollar Limit
The dollar limit on work-related expenses that can be taken into account in calculating your credit is $3,000 for one qualifying person, or $6,000 or two or more qualifying persons. If you paid work-related expenses for the care of two or more persons, the $6,000 limit does not necessarily have to be divided equally among them.
The dollar limit is a yearly limit, and it remains the same no matter how long you have a qualifying person in your household during the year.
As mentioned above, if you receive dependent care benefits from your employer, the amount of those benefits reduces your dollar limit on work-related expenses eligible for the credit.
Amount of the Credit
The amount of the credit is calculated by taking your work-related child and dependent care expenses (subject to the earned income and dollar limits), and multiplying by a percentage based on your adjusted gross income. There is a table on Form 2441, Child and Dependent Care Expenses, and on Schedule 2 of Form 1040A that shows these percentages. The maximum credit rate is 35%, for adjusted gross income of up to $15,000, and progressively decreases to 20% as adjusted gross income rises to $43,000.
How To Claim the Credit
In order to claim this credit, or to exclude or deduct dependent care benefits, you will need to file Form 2441, Child and Dependent Care Expenses, if you file Form 1040, or Schedule 2 if you file Form 1040A. You cannot file Form 1040EZ.
The credit is limited to the amount of any other taxes you owe, and you cannot get a refund if the child and dependent care credit is more than this amount.