There are a number of eligibility requirements to satisfy before potentially receiving a child or dependent care credit, so it's a good idea to familiarize yourself with the rules before preparing Form 2441.
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Child and dependent care expenses
If you hire someone to care for a dependent or your disabled spouse, and you report income from employment or self-employment on your tax return, you may be able to take the credit for child and dependent care expenses on Form 2441. There are a number of eligibility requirements you must satisfy first, so it’s a good idea to familiarize yourself with the rules before preparing Form 2441.
General credit requirements
The care provider expenses you incur must be for the benefit of dependent children under the age of 13, your disabled spouse, or dependents of any age who are mentally or physically unable to care for themselves. Not every expense will qualify for the credit; the Internal Revenue Service only permits expenses that were necessary for you to go to work, look for a job, or attend school full-time.
You must also exclude from the credit calculation any payment made to a different dependent who serves as the care provider. However, if you hire your adult children, you can include payments to them provided they are at least 19 years old. Finally, the credit for child and dependent care expenses is only available if you report “earned income” on your tax return. If you are filing a joint return, both you and your spouse must report earned income unless one of you is disabled.
Earned and unearned income
As you prepare Form 2441, you’ll notice it includes a line to report your earned income. The IRS defines “earned income” as the money you receive from employment and self-employment activities.
In limited circumstances, however, earned income will include other payments that aren’t earned at work or in your business. Those payments can include the taxable disability benefits you receive while you’re unable to work, and tax-free combat pay you receive as a result of military service.
Generally, all other income you receive is treated as “unearned income” that cannot be used to qualify for the credit. Common types of unearned income include pensions, Social Security retirement benefits, unemployment compensation, and interest, dividends and capital gains. If your sole source of income for the year is unemployment compensation, for example, you aren’t eligible for the child and dependent care credit because you did not have any earned income.
Form 2441 care providers
In Part I of Form 2441, report the names of the individuals and organizations you make payments to during the year for care provider services. The IRS also requires their addresses, Social Security or employer identification numbers, and the amount that you paid them.
Finalizing Form 2441
The form requires additional information from your tax return and other related documents to calculate the amount of credit you can get. This information includes any nontaxable dependent care benefits you receive. This can be from work, from a daycare facility, or from a flexible spending account to which you have made pretax contributions. You reduce your dependent care expenses by the amount of these benefits. You also need to report your adjusted gross income on Form 2441 since it directly impacts how much of a credit you can take.
The final step, of course, is to include Form 2441 with your 1040 when filing your taxes for the year.
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