How To Figure the Credit Your credit is a percentage of your work-related expenses. Yourexpenses are subject to the earned income limit and the dollar limit.The percentage is based on your adjusted gross income. Figuring TotalWork-Related Expenses To figure the credit for 1999 work-related expenses, count onlythose you paid by December 31, 1999. Expenses prepaid in an earlier year.If you pay for services before they are provided, you can count theprepaid expenses only in the year the care is received. Claim theexpenses for the later year as if they were actually paid in thatlater year. Expenses not paid until the following year.Do not count 1998 expenses that you paid in 1999 aswork-related expenses for 1999. You may be able to claim an additionalcredit for them on your 1999 return, but you must figure itseparately. See Payments for previous year's expenses underAmount of Credit, later. TaxTip: If you had expenses in 1999 that you did not pay until 2000, youcannot count them when figuring your 1999 credit. You may be able toclaim a credit for them on your 2000 return. Expenses reimbursed.If a state social services agency pays you a nontaxable amount toreimburse you for some of your child and dependent care expenses, youcannot count the expenses that are reimbursed as work-relatedexpenses. Example.You paid work-related expenses of $3,000. You are reimbursed $2,000by a state social services agency. You can use only $1,000 to figureyour credit. Medical expenses.Some expenses for the care of qualifying persons who are not ableto care for themselves may qualify as work-related expenses and alsoas medical expenses. You can use them either way, but you cannot usethe same expenses to claim both a credit and a medical expensededuction. If you use these expenses to figure the credit and they are morethan the earned income limit or the dollar limit, discussed later, youcan add the excess to your medical expenses. However, if you use yourtotal expenses to figure your medical expense deduction, you cannotuse any part of them to figure your credit. For information on medicalexpenses, see Publication 502, Medical and Dental Expenses. Caution: Amounts excluded from your income under your employer's dependentcare benefits plan cannot be used to claim a medicalexpense deduction. Employer's Dependent Care Benefits Dependent care benefits include: Amounts your employer pays directly to either you or yourcare provider for the care of your qualifying person while you work,and The fair market value of care in a day-care facilityprovided or sponsored by your employer. Your salary may have been reduced to pay for these benefits. Ifyou received benefits, they should be shown on your Form W-2,Wage and Tax Statement. See Statement foremployee, later. Exclusion.If your employer provides dependent care benefits under a qualifiedplan, you may be able to exclude these benefits from your income. Youremployer can tell you whether your benefit plan qualifies. If it does,you must complete Part III of either Form 2441 or Schedule 2 (Form1040A) to claim the exclusion even if you cannot take the credit. Youcannot use Form 1040EZ. The amount you can exclude is limited to the smallest of: The total amount of dependent care benefits you receivedduring the year, The total amount of qualified expenses you incurred duringthe year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Statement for employee.Your employer must give you a Form W-2, (orsimilar statement),showing in box 10 the total amountof dependent care benefits provided to you during the year under aqualified plan. Your employer will also include any dependent carebenefits over $5,000 in your wages shown in box 1 of your FormW-2. Forfeitures.Forfeitures are amounts credited to your dependent care benefitaccount (flexible spending account) and included in the amount shownin box 10 of your Form W-2, but not received because you did notincur the expense. When figuring your exclusion, subtract anyforfeitures from the total dependent care benefits reported by youremployer. To do this, enter the forfeited amount on line 11 of Form2441 or Schedule 2 (Form 1040A). Caution: Forfeitures do not include amounts that you expect to receive inthe future.   Claiming the credit. If you exclude dependent care benefits from your income, the amountof the excluded benefits: Is not included in your work-related expenses, and Reduces the dollar limit, discussed later. Earned Income Limit The amount of work-related expenses you use to figure your creditcannot be more than: Your earned income for the year, if you are singleat the end of the year, or The smaller of your or your spouse's earned income for theyear, if you are married at the end of the year. Earned income is defined under Earned Income Test,earlier. TaxTip: For purposes of item (2), use your spouse's earned income for theentire year, even if you were married for only part of the year. 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. Youpaid work-related expenses of $3,000 for the care of your 5-year-oldchild and qualified to claim the credit. The amount of expenses youuse to figure your credit cannot be more than $2,000 (the smaller ofyour earned income or that of your spouse). Separated spouse.If you are legally separated or married and living apart from yourspouse (as described under Joint Return Test, earlier), youare not considered married for purposes of the earned income limit.Use only your income in figuring the earned income limit. Surviving spouse.If your spouse died during the year and you file a joint return asa surviving spouse, you are not considered married for purposes of theearned income limit. Use only your income in figuring the earnedincome limit. Community property laws.You should disregard community property laws when you figure earnedincome for this credit. Self-employment earnings.If you are self-employed, include your net earnings in earnedincome. For purposes of the child and dependent care credit, netearnings from self-employment generally means the amount from line 3of Schedule SE (either Section A or Section B) minus anydeduction for self-employment tax on line 27 of Form 1040. Includeyour self-employment earnings in earned income, even if they are lessthan $400 and you did not file Schedule SE. Statutory employee.If you filed Schedule C or C-EZ to report income as astatutory employee, also include as earned income the amount from line1 of that Schedule C or C-EZ. Net loss.You must reduce your earned income by any net loss fromself-employment. Optional method if earnings are low or a net loss.If your net earnings from self-employment are low or you have a netloss, you may be able to figure your net earnings by using an optionalmethod instead of the regular method. Get Publication 533,Self-Employment Tax, for details. If you use an optionalmethod to figure net earnings for self-employment tax purposes,include those net earnings in your earned income for this credit. Inthis case, subtract any deduction you claimed on Form 1040, line 27,from the total of the amounts on Schedule SE, Section B, lines 3 and4b, to figure your net earnings. Student-spouse or spouse not able to care for self.Your spouse who is either a full-time student or not able to carefor himself or herself is treated as having earned income. His or herearned income for each month is considered to be at least $200 ifthere is one qualifying person in your home, or at least $400 if thereare two or more. Spouse works.If your spouse works during that month, use the higher of $200 (or$400) or his or her actual earned income for that month. Spouse qualifies for part of month.If your spouse is a full-time student or not able to care forhimself or herself for only part of a month, the full $200 (or $400)still applies for that month. Both spouses qualify.If, in the same month, both you and your spouse are eitherfull-time students or not able to care for yourselves, only one spousecan be considered to have this earned income of $200 (or $400) forthat month. 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 11months during the tax year. During the 11 months, Jim pays $2,750 of work-related expenses forSharon's care. These expenses also qualify as medical expenses. Theiradjusted gross income is $29,000 and the entire amount is Jim's earnedincome. Jim and Sharon's earned income limit is the smallest of thefollowing amounts. Jim and Sharon's Earned IncomeLimit 1) Work-related expenses Jim paid $ 2,750   2) Jim's earned income $29,000   3) Income considered earned by Sharon  (11 $200) $ 2,200   Jim and Sharon can use $2,200 to figure the credit and treatthe balance of $550 ($2,750 - $2,200) as a medical expense.However, if they use the $2,750 first as a medical expense, theycannot use any part of that amount to figure the credit. Dollar Limit There is a dollar limit on the amount of your work-related expensesyou can use to figure the credit. This limit is $2,400 for onequalifying person, or $4,800 for two or more qualifying persons. TaxTip: If you paid work-related expenses for the care of two or morequalifying persons, the $4,800 limit does not need to be dividedequally among them. For example, if your work-related expenses for thecare of one qualifying person are $2,000 and your work-relatedexpenses for another qualifying person are $2,800, you can use thetotal, $4,800, when figuring the credit. Yearly limit. The dollar limit is a yearly limit. The amount of the dollar limitremains the same no matter how long, during the year, you have aqualifying person in your household. Use the $2,400 limit if you paidwork-related expenses for the care of one qualifying person at anytime during the year. Use $4,800 if you paid work-related expenses forthe care of more than one qualifying person at any time during theyear. 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 thatprovides preschool child care. You paid $300 per month for the childcare. You can use the full $1,800 you paid ($300 6 months) asqualified expenses since it is not more than the $2,400 yearly limit. Reduced Dollar Limit If you received dependent care benefits from youremployerthat you exclude fromyour income, you must subtract that amount from the dollar limit thatapplies to you. Your reduced dollar limit is figured on lines 20through 24 of Form 2441 or Schedule 2 (Form 1040A). SeeEmployer's Dependent Care Benefits, earlier, forinformation on excluding these benefits. Example.George is a widower with one child and earns $24,000 a year. Hepays work-related expenses of $1,900 for the care of his 4-year-oldchild and qualifies to claim the credit for child and dependent careexpenses. His employer pays an additional $1,000 under a qualifieddependent care benefit plan. This $1,000 is excluded from George'sincome. Although the dollar limit for his work-related expenses is $2,400(one qualifying person), George figures his credit on only $1,400 ofthe $1,900 work-related expenses he paid. This is because his dollarlimit is reduced as shown next. George's Reduced Dollar Limit  1) Maximum allowable expenses for one  qualifying person $2,400    2) Minus: Dependent care benefitsGeorge  excludes from income -1,000    3) Reduced dollar limit on expenses George  can use for the credit $1,400   Amount of Credit To determine the amount of your credit, multiply your work-relatedexpenses (after applying the earned income and dollar limits) by apercentage. This percentage depends on your adjusted gross incomeshown on line 34 of Form 1040 or line 19 of Form 1040A. The followingtable shows the percentage to use based on adjusted gross income.   Adjusted Gross Income Percentage    Over     But not over $    0     --   $10,000   30%   10,000     --   12,000   29%   12,000     --   14,000   28%   14,000     --   16,000   27%   16,000     --   18,000   26%   18,000     --   20,000   25%   20,000     --   22,000   24%   22,000     --   24,000   23%   24,000     --   26,000   22%   26,000     --   28,000   21%   28,000     --   No limit   20%   Payments for previous year's expenses.If you had work-related expenses in 1998 that you paid in 1999, youmay be able to increase the credit on your 1999 return. Attach astatement to your form showing how you figured the additional amountfrom 1998. Then above line 9 on Form 2441 or Schedule 2 (Form 1040A),write "PYE" and the amount of the credit. To the right of thatamount, also write the name and taxpayer identification number of theperson for whom you paid the prior year's expenses. Then add thiscredit to the amount on line 9, and replace the amount on line 9 withthe total. Pencil: Use the following worksheet to figure the credit you may claim for1998 expenses paid in 1999.    Worksheet for 1998 Expenses Paid in1999 1) Enter your 1998 qualified expenses paid in1998            2) Enter your 1998 qualified expenses paid in1999            3) Szeged accommodationAdd the amounts on lines 1 and 2            4) Enter $2,400 if care was for one qualifyingperson ($4,800 if for two or more)            5) Enter any dependent care benefits received for1998 and excluded from your income (from line 18 of 1998 Form 2441 orSchedule 2 (Form 1040A))            6) Subtract amount on line 5 from amount on line 4and enter the result            7) Appartements ZakopaneCompare your earned income for 1998 and yourspouse's earned income for 1998 and enter thesmaller amount            8) Compare the amounts on lines 3, 6, and 7 andenterthe smallest amount            9) Enter the amount on which you figured thecredit for 1998 (from line 6 of 1998 Form 2441 or Schedule 2 (Form1040A))            10) Subtract amount on line 9 from amount on line 8and enter the result. If zero or less, stop here. You cannot increaseyour credit by any previous year's expenses            11) Enter your 1998 adjusted gross income (fromline 33 of your 1998 Form 1040 or line 18 of your 1998 Form 1040A)            12) Find your 1998 adjusted gross income in thetable of percentages (shown earlier) and enter the correspondingdecimal amount here            13) Multiply line 10 by line 12. Add this amount toyour 1999 credit and enter the total on line 9 of your 1999 Form 2441or Schedule 2 (Form 1040A). Above line 9, write "PYE," the amountof this credit, and the name and taxpayer identification number of theperson for whom you paid the prior year's expenses            Example.In 1998, Sam and Kate had child-care expenses of $2,600 for their12-year-old child. Of the $2,600, they paid $2,000 in 1998 and $600 in1999. Their adjusted gross income for 1998 was $30,000. Sam's earnedincome of $14,000 was less than Kate's earned income. A credit fortheir 1998 expenses paid in 1999 is not allowed in 1998. It is allowedfor the 1999 tax year, but they must use their adjusted gross incomefor 1997 to compute the amount. The worksheet they use to figure thiscredit is shown next.   Sam & Kate's Worksheet for 1998Expenses Paid in 1999 1) Enter your 1998 qualified expenses paid in1998 $ 2,000 2) Enter your 1998 qualified expenses paid in1999        600 3) Add the amounts on lines 1 and 2 $ 2,600 4) Enter $2,400 if care was for one qualifyingperson ($4,800 if for two or more) $ 2,400 5) Enter any dependent care benefits received for1998 and excluded from your income (from line 18 of 1998 Form 2441 orSchedule 2 (Form 1040A))          0 6) Subtract amount on line 5 from amount on line 4and enter the result $ 2,400 7) Compare your earned income for 1998 and yourspouse's earned income for 1998 and enter thesmaller amount    $14,000 8) Compare the amounts on lines 3, 6, and 7 andenter the smallest amount $ 2,400 9) Enter the amount on which you figured thecredit for 1998 (from line 6 of 1998 Form 2441 or Schedule 2 (Form1040A))      2,000 10) Subtract amount on line 9 from amount on line 8and enter the result. If zero or less, stop here. You cannot increaseyour credit by any previous year's expenses        400 11) Enter your 1998 adjusted gross income (fromline 33 of your 1998 Form 1040 or line 18 of your 1998 Form 1040A)    $30,000 12) Find your 1998 adjusted gross income in thetable of percentages (shown earlier) and enter the correspondingdecimal amount here        .20 13) Multiply line 10 by line 12. Add this amount toyour 1999 credit and enter the total on line 9 of your 1999 Form 2441or Schedule 2 (Form 1040A). Above line 9, write "PYE," the amountof this credit, and the name and taxpayer identification number of theperson for whom you paid the prior year's expenses $   80 Sam and Kate add the $80 from line 13 of this worksheet totheir 1999 credit and enter the total on line 9 of their Schedule 2(Form 1040A). They enter "PYE $80" and their child's name and SSNabove line 9. Tax credit not refundable.You cannot get a refund for any part of the credit that is morethan your tax.