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.