25.4 Qualifying for Child and Dependent Care Credit

Did you hire someone to care for your children or other dependents while you work? If so, you may qualify for a tax credit for the expenses. You may claim the credit even if you work part time. You may claim the credit if you work from home and pay someone to care for your child while you are there. The credit is generally available to the extent you have earnings from employment. Your employer may have a plan qualifying for tax-free child care and, if you are covered, you may be unable to claim a tax credit (25.8).

Where to claim the credit.

The credit is claimed on Form 2441 if you file Form 1040 or Form 1040A. The size of the credit depends on the amount of your care expenses, number of dependents, and income. Depending on your adjusted gross income, the credit for 2012 is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. The minimum credit percentage of 20% applies if your adjusted gross income exceeds $43,000. See Table 25-1 (25.5).

Table 25-1 Allowable Credit for 2012*

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image Caution
Nonrefundable Credit
The dependent care credit is limited to your tax liability. In other words, if the credit amount exceeds the tax that you owe, you will not be given a refund of the difference.
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Credit requirements.

To qualify for the credit on your 2012 return, you must:

1. Incur expenses to care for a qualifying person (25.7) in order to earn income. In the case of a married couple, this requires both spouses to work either at full- or part-time positions. An exception to the earned income rule is made for a spouse who is a full-time student or incapacitated (25.6). Qualifying care expenses are discussed in 25.8. Limits on the amount of qualifying costs are discussed in 25.5.
2. File jointly if you are married, unless you are separated under the rules discussed in 25.9.
3. Hire a care provider other than your child who is under age 19 at the end of the year, your spouse, or a person you can claim as a dependent (25.8).
4. Have qualifying expenses (25.8) in excess of tax-free reimbursements received from your employer.
5. Report on your tax return the name, address, and taxpayer identification number (Social Security number for individuals) of the child-care provider; see below.

Identifying care provider on your return.

You must list the name, address, and taxpayer identification number of the person you paid to care for your dependent on Form 2441. You do not need the taxpayer identification number if a tax-exempt charity provides the dependent care services. Failure to list the correct name, address, and number may result in a disallowance of the credit. To avoid this possibility, ask the provider to fill out Form W-10 or get the identifying information from a Social Security card, driver’s license, or business letterhead or invoice. If a household employee has filled out Form W-4 for you, this may act as a backup record.

Withholding tax for a housekeeper.

Where you employ help to care for your dependent in your home, you may be liable for FICA (Social Security) and FUTA (unemployment) taxes (38.3).

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