25.5 Limits on the Dependent Care Credit

The credit is a percentage of expenses paid for the care of a qualifying person (25.7) to allow you to work and earn income. Qualifying expenses are discussed at 25.8. The credit percentage depends on your income.

Caution: Less favorable credit rules will take effect in 2013 unless the 2012 rules discussed below are extended. Congress is expected to pass an extension but had not yet done so when this book went to press; see the e-Supplement at jklasser.com for an update.

Limit on expenses.

In figuring the credit for 2012, you take into account qualifying expenses (25.8) up to a limit of $3,000 for one dependent, or $6,000 for two or more dependents. The $3,000 or $6,000 limit applies even if your actual expenses are much greater. Further, the $3,000 or $6,000 limit must be reduced by tax-free benefits received from an employer’s dependent care plan. Finally, if your earned income is less than the $3,000 or $6,000 limit, your credit is figured on the lower income amount.

Filing Tip

Employer Reimbursements Reduce Credit

Expenses qualifying for the dependent care credit are reduced by any tax-free reimbursements under a qualified employer dependent care program. That is, the reimbursements reduce the 2012 expense limit of $3,000 for one dependent, or the $6,000 expense limit for two or more qualifying dependents (25.8). Your employer will report reimbursements in Box 10 of your Form W-2. You figure the tax-free portion of the reimbursement, and any reduction to the credit expense base, on Form 2441.

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Take into account only payments in 2012 for 2012 services.

Your credit for 2012 must be based on payments made in 2012 for care services provided in 2012. If you paid for 2011 services in 2012, you may be able to claim an additional credit on your 2012 return, but only in limited circumstances, as discussed at the end of this section. If in 2012 you prepay for 2013 services, you must allocate your payment. Only payments for 2012 services should be counted toward the $3,000 or $6,000 limit when figuring your 2012 credit.

Credit percentage.

Depending on your income, a credit percentage of 20% to 35% applies to your 2012 expenses up to the $3,000 (one dependent) or $6,000 (two or more dependents) limit. The maximum credit is 35% for families with adjusted gross income of $15,000 or less. For adjusted gross income over $15,000, the 35% credit is reduced by 1% for each $2,000 of adjusted gross income or fraction of $2,000 over $15,000, but not below 20%. The 20% credit applies to adjusted gross incomes exceeding $43,000.

The dependent care credit is nonrefundable. It is limited to your tax liability; follow the IRS instructions.

Additional credit for 2012 payment of 2011 dependent care expenses.

Payments made in 2012 for 2011 services may be eligible for an additional credit on your 2012 return but only if you did not use up the $3,000 or $6,000 expense limit that applied for the 2011 credit. Follow the instructions for Form 2441 to figure the additional credit.