Previous Page: Publication 503 - Child and Dependent Care Expenses - Child and Dependent Care Expenses Next Page: Publication 503 - Child and Dependent Care Expenses - How To Claim the Credit Use   to find additional instances of index items.

Taxmap/pubs/p503-001.htm#TXMP2dcfcfb9 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.

Taxmap/pubs/p503-001.htm#TXMP4f0287b8 Figuring Total   Work-Related Expenses

Itemized Deduction, Work-Related Expenses

To figure the credit for 2004 work-related expenses, count only those you paid by December 31, 2004.

Taxmap/pubs/p503-001.htm#TXMP133e8cc2 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.

Taxmap/pubs/p503-001.htm#TXMP24dbccd4 Expenses not paid until the following year.

Do not count 2003 expenses that you paid in 2004 as work-related expenses for 2004. You may be able to claim an additional credit for them on your 2004 return, but you must figure it separately. See Payments for previous year's expenses under Amount of Credit, later.

If you had expenses in 2004 that you did not pay until 2005, you cannot count them when figuring your 2004 credit. You may be able to claim a credit for them on your 2005 return.

Taxmap/pubs/p503-001.htm#TXMP7ae48ea1 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.

Taxmap/pubs/p503-001.htm#TXMP6e798bbe
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.

Taxmap/pubs/p503-001.htm#TXMP6ea6b9bf 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. For information on medical expenses, see Publication 502, Medical and Dental Expenses.

Amounts excluded from your income under your employer's dependent care benefits plan cannot be used to claim a medical expense deduction.

Taxmap/pubs/p503-001.htm#TXMP4750a584 Dependent Care Benefits

Dependent Care Benefits

If you receive dependent care benefits, your dollar limit for purposes of the credit may be reduced. See Reduced Dollar Limit, later. But, even if you cannot take the credit, you may be able to take an exclusion or deduction for the dependent care benefits.

Taxmap/pubs/p503-001.htm#TXMP1b5940a0 Dependent care benefits.

Dependent care benefits include:

1. Amounts paid 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 daycare 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 Form W-2, Wage and Tax Statement. See Statement for employee, later.

Taxmap/pubs/p503-001.htm#TXMP68ea21fb Exclusion or deduction.

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 you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Therefore, you would not get an exclusion from wages but instead a deduction on Form 1040, Schedule C, line 14; Schedule E, line 18; or Schedule F, line 17. Partnerships would report a separately-stated deduction on Schedule K-1 (Form 1065), line 13, that you would enter on Schedule E (Form 1040), line 28.

If your plan qualifies, you must complete Part III of either Form 2441 or Schedule 2 (Form 1040A) to claim the exclusion. You cannot use Form 1040EZ. You must use Form 2441 to claim the deduction.

The amount you can exclude or deduct 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).

Taxmap/pubs/p503-001.htm#TXMP4dd50edd Figuring earned income.

When figuring your exclusion or deduction, the definition of earned income is not exactly the same as the definition used when figuring the credit for child and dependent care expenses.

Generally, only taxable compensation is included. However, you can elect to include nontaxable combat pay in earned income. You should figure your exclusion or deduction both ways and make the election if it gives you a greater tax benefit.

The election to include nontaxable combat pay in earned income cannot be made on the return of a taxpayer whose tax year ended before October 4, 2004, due to his or her death.

Note. Earned income does not include any dependent care benefits you receive.

Taxmap/pubs/p503-001.htm#TXMP73727caa 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 on your Form W-2 in box 1.

Taxmap/pubs/p503-001.htm#TXMP71cb63a8 Forfeitures.

Forfeitures are amounts credited to your dependent care benefit account (flexible spending account) and included in the amount shown on your Form W-2 in box 10, 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.

Taxmap/pubs/p503-001.htm#TXMP50d632e1 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.

Taxmap/pubs/p503-001.htm#TXMP05ebd75d Earned Income Limit

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 for the purposes of figuring the credit 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.

Taxmap/pubs/p503-001.htm#TXMP773bae73
Example.

You remarried on December 3. Your earned income for the year was $18,000. Your new spouse's earned income for the year was $2,000. You paid work-related expenses of $3,000 for the care of your 5-year-old child and qualified to claim the credit. The amount of expenses you use to figure your credit cannot be more than $2,000 (the smaller of your earned income or that of your spouse).

Taxmap/pubs/p503-001.htm#TXMP2fd0c387 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.

Taxmap/pubs/p503-001.htm#TXMP12b0762e 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.

Taxmap/pubs/p503-001.htm#TXMP6f39b6f5 Community property laws.

Disregard community property laws when you figure earned income for this credit.

Taxmap/pubs/p503-001.htm#TXMP2dac4cfd Self-employment earnings.

If you are self-employed, include your net earnings in earned income. For purposes of the child and dependent care credit, net earnings from self-employment generally means the amount from line 3 of Schedule SE (either Section A or Section B) minus any deduction for self-employment tax on Form 1040, line 30. Include your self-employment earnings in earned income, even if they are less than $400 and you did not file Schedule SE.

Taxmap/pubs/p503-001.htm#TXMP1f97d359 Statutory employee.

If you filed Schedule C or C-EZ to report income as a statutory employee, also include as earned income the amount from line 1 of that Schedule C or C-EZ.

Taxmap/pubs/p503-001.htm#TXMP2ec4f8d2 Net loss.

You must reduce your earned income by any net loss from self-employment.

Taxmap/pubs/p503-001.htm#TXMP61f8aba2 Optional method if earnings are low or a net loss.

If your net earnings from self-employment are low or you have a net loss, you may be able to figure your net earnings by using an optional method instead of the regular method. Get Publication 533, Self-Employment Tax, for details. If you use an optional method to figure net earnings for self-employment tax purposes, include those net earnings in your earned income for this credit. In this case, subtract any deduction you claimed on Form 1040, line 30, from the total of the amounts on Schedule SE, Section B, lines 3 and 4b, to figure your net earnings.

Taxmap/pubs/p503-001.htm#TXMP4f12f53c 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 $250 if there is one qualifying person in your home, or at least $500 if there are two or more.

Taxmap/pubs/p503-001.htm#TXMP4f0c74a4 Spouse works.

If your spouse works during that month, use the higher of $250 (or $500) or his or her actual earned income for that month.

Taxmap/pubs/p503-001.htm#TXMP430fd5bf 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 $250 (or $500) still applies for that month.

Taxmap/pubs/p503-001.htm#TXMP43261625 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 $250 (or $500) for that month.

Taxmap/pubs/p503-001.htm#TXMP20b86d05
Example.

Jim works and keeps up a home for himself and his wife Sharon. Because of an accident, Sharon is not able to care for herself for 11 months during the tax year.

During the 11 months, Jim pays $3,300 of work-related expenses for Sharon's care. These expenses also qualify as medical expenses. Their adjusted gross income is $29,000 and the entire amount is Jim's earned income.

Jim and Sharon's earned income limit is the smallest of the following amounts.

	Jim and Sharon's Earned Income Limit
1)	Work-related expenses Jim paid	$		3,300
2)	Jim's earned income	$		29,000
3)	Income considered earned by Sharon  (11 × $250)	$		2,750

Jim and Sharon can use $2,750 to figure the credit and treat the balance of $550 ($3,300 − $2,750) as a medical expense. However, if they use the $3,300 first as a medical expense, they cannot use any part of that amount to figure the credit.

Taxmap/pubs/p503-001.htm#TXMP599c5333 Dollar Limit

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 $3,000 for one qualifying person, or $6,000 for two or more qualifying persons.

If you paid work-related expenses for the care of two or more qualifying persons, the $6,000 limit does not need to be divided equally among them. For example, if your work-related expenses for the care of one qualifying person are $3,200 and your work-related expenses for another qualifying person are $2,800, you can use the total, $6,000, when figuring the credit.

Taxmap/pubs/p503-001.htm#TXMP543eecb3 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 $3,000 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Use $6,000 if you paid work-related expenses for the care of more than one qualifying person at any time during the year.

Taxmap/pubs/p503-001.htm#TXMP04aee2a2
Example.

In July of this year, to permit your spouse to begin a new job, you enrolled your 3-year-old daughter in a nursery school that provides preschool childcare. You paid $300 per month for the childcare. You can use the full $1,800 you paid ($300 × 6 months) as qualified expenses since it is not more than the $3,000 yearly limit.

Taxmap/pubs/p503-001.htm#TXMP5107f06c Reduced Dollar Limit

Reduced Dollar Limit

If you received dependent care benefits that you exclude or deduct from your income, you must subtract that amount from the dollar limit that applies to you. Your reduced dollar limit is figured on lines 28 through 32 of Form 2441 or lines 22 through 26 of Schedule 2 (Form 1040A). See Dependent Care Benefits, earlier, for information on excluding or deducting these benefits.

Taxmap/pubs/p503-001.htm#TXMP4c67edeb
Example.

George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $2,900 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 qualified dependent care benefit plan. This $1,000 is excluded from George's income.

Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. This is because his dollar limit is reduced as shown next.

	George's Reduced Dollar Limit
1)	Maximum allowable expenses for one  qualifying person	$3,000
2)	Minus: Dependent care benefits George  excludes from income	- 1,000
3)	Reduced dollar limit on expenses George  can use for the credit	$2,000

Taxmap/pubs/p503-001.htm#TXMP3210565d Amount of Credit

To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by a percentage. This percentage depends on your adjusted gross income shown on Form 1040, line 37, or Form 1040A, line 22. The following table shows the percentage to use based on adjusted gross income.

Taxmap/pubs/p503-001.htm#TXMP7965adff Payments for previous year's expenses.

If you had work-related expenses in 2003 that you paid in 2004, you may be able to increase the credit on your 2004 return. Attach a statement to your form showing how you figured the additional amount from 2003. Then write "CPYE" and the amount of the credit on the dotted line next to line 9 on Form 2441 or in the space to the left of line 9 on Schedule 2 (Form 1040A). Also write the name and taxpayer identification number of the person for whom you paid the prior year's expenses. Then add this credit to the amount on line 9, and replace the amount on line 9 with the total.

Taxmap/pubs/p503-001.htm#TXMP6aaa2bd9
Example.

In 2003, Sam and Kate had childcare expenses of $2,600 for their 12-year-old child. Of the $2,600, they paid $2,000 in 2003 and $600 in 2004. Their adjusted gross income for 2003 was $30,000. Sam's earned income of $14,000 was less than Kate's earned income. A credit for their 2003 expenses paid in 2004 is not allowed in 2003. It is allowed for the 2004 tax year, but they must use their adjusted gross income for 2003 to compute the amount. The worksheet they use to figure this credit is shown on page 15. Taxmap/pubs/p503-001.htm#w15004M01

Worksheet A. Worksheet for 2003 Expenses Paid in 2004 (Note: Use this worksheet to figure the credit you may claim for 2003 expenses paid in 2004.) 1.   Enter your 2003 qualified expenses paid in 2003 1.          2.   Enter your 2003 qualified expenses paid in 2004 2.          3.   Add the amounts on lines 1 and 2 3.          4.   Enter $3,000 if care was for one qualifying person ($6,000 if for two or more) 4.          5.   Enter any dependent care benefits received for 2003 and excluded from your income (from line 20 of 2003 Form 2441 or Schedule 2 (Form 1040A)) 5.          6.   Subtract amount on line 5 from amount on line 4 and enter the result 6.          7.   Compare your earned income for 2003 and your spouse's earned income for 2003 and enter the smaller amount 7.          8.   Compare the amounts on lines 3, 6, and 7 and enter the smallest amount 8.          9.   Enter the amount on which you figured the credit for 2003 (from line 6 of 2003 Form 2441 or Schedule 2 (Form 1040A)) 9.          10.   Subtract amount on line 9 from amount on line 8 and enter the result. If zero or less, stop here. You cannot increase your credit by any previous year's expenses 10.          11.   Enter your 2003 adjusted gross income (from line 35 of your 2003 Form 1040 or line 22 of your 2003 Form 1040A) 11.          12.   Find your 2003 adjusted gross income in the table of percentages (shown below) and enter the corresponding decimal amount here 12.                  IF your 2003 adjusted gross income is:   THEN the                 Over:   But not over:     percentage is:                 $   0 - $15,000      35%                 15,000 - 17,000     34%                 17,000 - 19,000     33%                 19,000 - 21,000     32%                 21,000 - 23,000     31%                 23,000 - 25,000     30%                 25,000 - 27,000     29%                 27,000 - 29,000     28%                 29,000 - 31,000     27%                 31,000 - 33,000     26%                 33,000 - 35,000     25%                 35,000 - 37,000     24%                 37,000 - 39,000     23%                 39,000 - 41,000     22%                 41,000 - 43,000     21%                 43,000 - No limit     20%           13.   Multiply line 10 by line 12. Add this amount to your 2004 credit and enter the total on line 9 of your 2004 Form 2441 or Schedule 2 (Form 1040A). Write the following on the dotted line next to line 9 of Form 2441 or in the space to the left of line 9 on Schedule 2 (Form 1040A): CPYE The amount of this credit for a prior year's expenses The name and taxpayer identification number of the person for whom you paid the prior year's expenses 13.

Taxmap/pubs/p503-001.htm#w15004M02

Worksheet A. Worksheet for 2003 Expenses Paid in 2004 - Illustration for Sam and Kate's Example. (Note: Use this worksheet to figure the credit you may claim for 2003 expenses paid in 2004.) 1.   Enter your 2003 qualified expenses paid in 2003 1.   $2,000 2.   Enter your 2003 qualified expenses paid in 2004 2.   600 3.   Add the amounts on lines 1 and 2 3.   2,600 4.   Enter $3,000 if care was for one qualifying person ($6,000 if for two or more) 4.   3,000 5.   Enter any dependent care benefits received for 2003 and excluded from your income (from line 20 of 2003 Form 2441 or Schedule 2 (Form 1040A)) 5.   0 6.   Subtract amount on line 5 from amount on line 4 and enter the result 6.   3,000 7.   Compare your earned income for 2003 and your spouse's earned income for 2003 and enter the smaller amount 7.   14,000 8.   Compare the amounts on lines 3, 6, and 7 and enter the smallest amount 8.   2,600 9.   Enter the amount on which you figured the credit for 2003 (from line 6 of 2003 Form 2441 or Schedule 2 (Form 1040A)) 9.   2,000 10.   Subtract amount on line 9 from amount on line 8 and enter the result. If zero or less, stop here. You cannot increase your credit by any previous year's expenses 10.   600 11.   Enter your 2003 adjusted gross income (from line 35 of your 2003 Form 1040 or line 22 of your 2003 Form 1040A) 11.   30,000 12.   Find your 2003 adjusted gross income in the table of percentages (shown below) and enter the corresponding decimal amount here 12.   .27         IF your 2003 adjusted gross income is:   THEN the                 Over   But not over     percentage is:                 $   0 - $15,000      35%                 15,000 - 17,000     34%                 17,000 - 19,000     33%                 19,000 - 21,000     32%                 21,000 - 23,000     31%                 23,000 - 25,000     30%                 25,000 - 27,000     29%                 27,000 - 29,000     28%                 29,000 - 31,000     27%                 31,000 - 33,000     26%                 33,000 - 35,000     25%                 35,000 - 37,000     24%                 37,000 - 39,000     23%                 39,000 - 41,000     22%                 41,000 - 43,000     21%                 43,000 - No limit     20%           13.   Multiply line 10 by line 12. Add this amount to your 2004 credit and enter the total on line 9 of your 2004 Form 2441 or Schedule 2 (Form 1040A). Write the following on the dotted line next to line 9 of Form 2441 or in the space to the left of line 9 on Schedule 2 (Form 1040A): CPYE The amount of this credit for a prior year's expenses The name and taxpayer identification number of the person for whom you paid the prior year's expenses 13.   $162

Sam and Kate add the $162 from line 13 of this worksheet to their 2004 credit and enter the total on line 9 of their Schedule 2 (Form 1040A). They enter "CPYE $162" and their child's name and SSN in the space to the left of line 9.

Previous Page:  Publication 503 - Child and Dependent Care Expenses - Child and Dependent Care Expenses Next Page:  Publication 503 - Child and Dependent Care Expenses - How To Claim the Credit Use     to find additional instances of index items.