Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 28

Child and Dependent Care Credit

The child and dependent care credit is designed to assist working parents with the cost of child care. The credit also helps other working taxpayers who care for someone incapable of self-care. The credit amount depends on the taxpayer's adjusted gross income (AGI), earned income, and whether the taxpayer has one or more qualifying children or other persons for whose care the credit may be claimed.

As a nonrefundable credit, the child and dependent care credit can be used only to the extent of the taxpayer's tax liability. Any unused credit amount is lost and cannot be carried forward to another year.

The credit is coordinated with the exclusion for dependent care assistance. In some cases, a taxpayer must decide whether to use the exclusion or the credit and can choose whichever provides the greater tax savings.

If dependent care is provided in the taxpayer's home by a household employee, the taxpayer may have to pay employment taxes on the wages of the household employee.

Overview of the Child and Dependent Care Credit

A taxpayer who works at a job or business or goes to school may be entitled to the child and dependent care credit. The credit is claimed on Form 2441, Child and Dependent Care Expenses, which is attached to Form 1040 or 1040A, U.S. Individual Income Tax Return, or Form 1040NR, U.S. Nonresident Alien Income Tax Return.

Some key points to remember about the child and dependent care credit are:

• The amount of the credit ...