Child and Dependent Care Credit

If you paid someone to care for a child or a dependent so you could work, you may be able to reduce your tax liability by claiming the credit for child and dependent care expenses on your federal income tax return. This credit is available to people who, in order to work or to look for work, have to pay for child care services for dependents under age 13.  The credit is also available if you paid for care of a spouse or a dependent of any age who is physically or mentally incapable of self-care.

To claim the credit for child and dependent care expenses, you must meet the following conditions:

  1. You must have earned income from wages, salaries, tips, or other employee compensation. If you are married, both you and your spouse must have earned income, unless one spouse was either a full-time student or was physically or mentally incapable of self-care.

  2. The payments for care cannot be paid to someone you can claim as your dependent on your return or to your child who is under age 19.

  3. Your filing status must be single, head of household, qualifying widow(er) with a dependent child, or married filing jointly.

  4. The care must have been provided for one or more qualifying persons identified on the form you use to claim the credit.

  5. You (and, if you’re married, your spouse) must maintain a home that you live in with the qualifying child or dependent.

What is a “qualifying” child or dependent? The child must have been under age 13 when care was provided and you must be able to claim the child as an exemption on your tax return. (For an exception to this rule, see “Child of Divorced or Separated Parents” in Publication 503, Child and Dependent Care Expenses, at the IRS web site).  A spouse who is mentally or physically unable to care for himself or herself also qualifies.  A dependent of any age who is physically or mentally incapable of self-care also qualifies if the person can be claimed as an exemption on your tax return (or could have been claimed, except for the fact that the person did not meet the gross income test).

To claim the credit, you’ll need to provide the name, address and taxpayer identification number of the care provider.  If the provider is an individual, this means that you need that individual's Social Security number. If it’s a business, you need the provider’s employer identification number. Use Form W-10, Dependent Care Provider’s Identification and Certification, to request this information from the care provider.

If you’re filing Form 1040, write the care provider information on Form 2441, Child and Dependent Care Expenses. If you’re filing Form 1040A, the care provider information goes on Schedule 2. You cannot use Form 1040EZ if you claim the child and dependent care credit.

As with all good things, there are some limitations on the amount of credit you can claim.  If you received dependent care benefits from your employer, other rules apply. 

For more information on the Child and Dependent Care Credit, see Publication 503, or Chapter 33 of Publication 17, Your Federal Income Tax, available at the IRS website (www.irs.gov).

Following is a reprint of information on the IRS web site concerning dependent care expenses.  The hyperlinks to specific documents/publications were accurate at the time this page was written; however, since the documents are on the IRS website, they could be moved at any time.

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Topic 602 - Child and Dependent Care Credit
 

If you paid someone to care for a qualifying individual so you (and your spouse if you are married) could work or look for work, you may be able to claim the credit for child and dependent care expenses. If you are married, both you and your spouse must have earned income, unless one spouse was either a full–time student or was physically or mentally incapable of self–care. The expenses you paid must have been for the care of one or more of the following qualifying individuals:

  1. Your dependent (under the rules for qualifying child) who was under age 13 when care was provided. For certain custodial parents, refer to Child of Divorced or Separated Parents in Publication 503 , Child and Dependent Care Expenses. A noncustodial parent, however, cannot treat a child as a qualifying person even if the parent may claim the child as an exemption.

  2. Your spouse who was mentally or physically not able to care for himself or herself and who has the same principal place of abode as you for more than one-half of the year.

  3. Your dependent who was physically or mentally not able to care for himself or herself, for whom you can claim an exemption, and who has the same principal place of abode as you for more than one-half of the year.

In addition to the conditions just described, to take the credit, you must meet all the following conditions:

  1. You must provide the taxpayer identification number (usually the social security number) of the qualifying person.

  2. Your filing status must be a status other than married filing separate (You must file a joint return if you are married.)

  3. The payments for care cannot be paid to someone you can claim as your dependent, or to your child who is under age 19 even if he or she is not your dependent.

  4. You must report the name, address, and taxpayer identification number, (either the social security number, or the employer identification number) of the care provider on your return. If the care provider is tax exempt, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider.

If you qualify for the credit, complete Form 1040A, Schedule 2 (PDF), or Form 2441 (PDF) with Form 1040 (PDF). If you received dependent care benefits from your employer (this amount should be shown on your Form W-2 (PDF)), you must complete Part III of Schedule 2 (Form 1040A) or Form 2441. You cannot use 1040EZ if you claim the child and dependent care credit.

The credit is a percentage, based on your adjusted gross income, of the amount of work–related child and dependent care expenses you paid to a care provider. There is a maximum dollar limit of dependent care expenses you can use for this credit. The amount of the maximum dollar limit depends on the taxable year and the number of qualifying children. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income. Refer to Publication 503, Child and Dependent Care Expenses, for additional information.

If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, refer to Publication 926, Household Employer's Tax Guide, or to Topic 756 and Topic 760

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UPDATE: (8/13/2007)

Final regs on dependent care credit reflect law changes and clarify qualifying expenses

T.D. 9354, 08/13/2007 ; Reg. § 1.21-1 ; Reg. § 1.21-2 ; Reg. § 1.21-3 ; Reg. § 1.21-4

IRS has issued final regs on the Code Sec. 21 credit for child and dependent care expenses. They reflect changes made by multiple statutory amendments, going back to the Deficit Reduction Act of '84 and clarify employment-related expenses that qualify for the credit. The final regs are effective Aug. 14, 2007.

Background. An individual taxpayer for whom there are one or more qualifying individuals—a qualifying child under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than half of the tax year—can claim a credit of 20% to 35% of the employment-related expenses that the taxpayer paid for the care of the qualifying individuals. Those expenses can't exceed $3,000 for one qualifying individual or $6,000 for more than one. Thus, the maximum credit is $1,050 if there is one qualifying individual and $2,100 if there are two or more qualifying individuals. The expenses are subject to earned income limitations, and must be reduced by amounts excluded from gross income under a dependent care assistance program. The credit is lost if proper identification information isn't provided for the qualifying individuals or for the care provider.

Proposed reliance regs issued at the end of May of 2006 reflected the numerous statutory amendments to the credit as it was originally enacted in former Code Sec. 44, see Weekly Alert ¶  17 05/25/2006 . The proposed regs also renumbered, restructured, and clarified the previous final regs in Reg § 1.44A-1 through Reg § 1.44A-4 (which are removed by the new final regs).

Final regs. The final regs adopt the proposed regs with some modifications and provide a number of examples illustrating these rules. The final regs incorporate several changes to Code Sec. 21 . They reflect that the special dependency rule of Code Sec. 21(e)(5) applies to children of parents who live apart at all times during the last 6 months of the calendar year, as well as to the children of separated or divorced parents. They also reflect the changes made to the definitions of qualifying individual and custodial parent by the Gulf Opportunity Zone Act of 2005. In addition, they clarify that, for tax years beginning after Dec. 31, 2004, costs for care outside the taxpayer's household of a qualifying individual who is a dependent or spouse incapable of self-care who regularly spends at least 8 hours each day in the taxpayer's household may continue to qualify for the credit. ( Reg. § 1.21-1(b) )

The final regs clarify that only expenses for the care of a qualifying individual that are to enable the taxpayer to be gainfully employed qualify for the credit. Thus, services must be performed before a disqualifying event (e.g., a child turning 13) and at a time when the purpose is to enable the taxpayer to be gainfully employed. In determining whether expenses are employment-related expenses, the time of payment is irrelevant. However, payment must be made before the credit is claimed. ( Reg. § 1.21-1(a)(4) )

The final regs retain the rule in the proposed regs that no allocation as to allowable and not allowable expenses is required for the cost of a specialty day camp (i.e., a camp that specializes in a particular activity, such as soccer or computers), but clarify that expenses for summer school and tutoring programs are not creditable. Unlike specialty day camp, summer school and tutoring programs are indistinguishable from school and are education. ( Reg. § 1.21-1(d)(7) )

Under the proposed regs, the additional cost of providing room and board for a caregiver over usual household expenses may be an employment-related expense. The final regs clarify that an increase in utilities (e.g., electric, water, and gas) may be employment-related expenses. ( Reg. § 1.21-1(d)(12) , Ex. 6)

The proposed regs provided that a taxpayer must allocate the cost of care on a daily basis if expenses are paid for a period during only part of which the taxpayer is employed or in active search of gainful employment. However, an exception to the allocation requirement applied for a short, temporary absence from work for a taxpayer paying for dependent care on a weekly, monthly, or annual basis. The final regs delete the restriction on the exception applying only to taxpayers who must pay for care on a weekly, monthly, or annual basis and clarify that only those costs that the taxpayer is required to pay during the absence qualify for the exception. The final regs also include a safe harbor that treats an absence of no more than 2 consecutive calendar weeks as a short, temporary absence. ( Reg. § 1.21-1(c)(2) )

 

Revised: 8/19/2007