Are These Work-Related Expenses?
Child and dependent care expenses must be work related to qualify for the credit. Expenses are considered work related only if both of the following are true.
Working or Looking for Work
To be work related, your expenses must allow you to work or look for work. If you are married, generally both you and your spouse must work or look for work. One spouse is treated as working during any month he or she is a full-time student or isn't physically or mentally able to care for himself or herself.
Your work can be for others or in your own business or partnership. It can be either full-time or part-time and it can be either in or out of your home.
Work also includes actively looking for work. However, if you don't find a job and have no earned income for the year, you can't take this credit. See You Must Have Earned Income, earlier.
An expense isn't considered work related merely because you had it while you were working. The purpose of the expense must be to allow you to work. Whether your expenses allow you to work or look for work depends on the facts.
Example 1. The cost of a babysitter while you and your spouse go out to eat isn't normally a work-related expense.
Example 2. You work during the day. Your spouse works at night and sleeps during the day. You pay for care of your 5-year-old child during the hours when you are working and your spouse is sleeping. Your expenses are considered work related.
Volunteer work. For this purpose, you aren't considered to be working if you do unpaid volunteer work or work for a nominal salary.
Work for part of year. If you work or actively look for work during only part of the period covered by the expenses, then you must figure your expenses for each day. For example, if you work all year and pay care expenses of $250 a month ($3,000 for the year), all the expenses are work related. However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $250 a month, your work-related expenses are limited to $625 (2½ months × $250).
Temporary absence from work. You don't have to figure your expenses for each day during a short, temporary absence from work, such as for vacation or a minor illness, if you have to pay for care anyway. Instead, you can figure your credit including the expenses you paid for the period of absence. An absence of 2 weeks or less is a short, temporary absence. An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances.
Example 1. You pay a dependent care center, which complies with all state and local regulations, to care for your 2-year-old daughter so you can work full-time. The center requires payment for days when a child is absent. You take 8 days off from work as vacation days. Because the absence is less than 2 consecutive calendar weeks, your absence is a short, temporary absence. You aren't required to allocate expenses between days worked and days not worked. The entire fee for the period that includes the 8 vacation days may be a work-related expense.
Example 2. You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. You become ill and miss 4 months of work but receive sick pay. You continue to pay the nanny to care for the children while you are ill. Your absence isn't a short, temporary absence, and your expenses aren't considered work related.
Part-time work. If you work part-time, you must generally figure your expenses for each day. However, if you are required to pay for care weekly, monthly, or in another way that includes both days worked and days not worked, you can figure your credit including the expenses you paid for days you didn't work. Any day when you work at least 1 hour is a day of work.
Example 1. You work 3 days a week. While you work, your 6-year-old child attends a dependent care center, which complies with all state and local regulations. You can pay the center $150 for any 3 days a week or $250 for 5 days a week. Your child attends the center 5 days a week. You must allocate your expenses for dependent care between days worked and days not worked; your work-related expenses are limited to $150 a week.
Example 2. The facts are the same as in Example 1, except the center doesn't offer a 3-day option. The entire $250 weekly fee may be a work-related expense.
Care Provider Identification Test
You must identify all persons or organizations that provide care for your child or dependent. Use Form 2441, Part I, to show the information.
If you don't have any care providers and you are filing Form 2441 only to report taxable income in Part III, enter “none” on line 1, column (a).
Information needed. To identify the care provider, you must give the provider's:
3.-Taxpayer identification number.
If the care provider is an individual, the taxpayer identification number is his or her social security number or individual taxpayer identification number. If the care provider is an organization, then it is the employer identification number (EIN).
You don't have to show the taxpayer identification number if the care provider is a tax-exempt organization (such as a church or school). In this case, enter “Tax-Exempt” in the space where Form 2441 asks for the number.
If you can't provide all of the information or the information is incorrect, you must be able to show that you used due diligence (discussed later) in trying to furnish the necessary information.
Getting the information. You can use Form W-10, to request the required information from the care provider. If you don't use Form W-10, you can get the information from one of the other sources listed in the instructions for Form W-10, including:
Due diligence. If the care provider information you give is incorrect or incomplete, your credit may not be allowed. However, if you can show that you used due diligence in trying to supply the information, you can still claim the credit.
You can show due diligence by getting and keeping the provider's completed Form W-10 or one of the other sources of information just listed. Care providers can be penalized if they don't provide this information to you or if they provide incorrect information.
Provider refusal. If the provider refuses to give you the identifying information, you should report on Form 2441 whatever information you have (such as the name and address). Enter “See Attached Statement” in the columns calling for the information you don't have. Then attach a statement explaining that you requested the information from the care provider, but the provider didn't give you the information. Be sure to write your name and SSN on this statement. The statement will show that you used due diligence in trying to furnish the necessary information.
U.S. citizens and resident aliens living abroad. If you are living abroad, your care provider may not have, and may not be required to get, a U.S. taxpayer identification number (for example, an SSN or an EIN). If so, enter “LAFCP” (Living Abroad Foreign Care Provider) in the space for the care provider's taxpayer identification number.
Dependent Care Benefits
If you receive dependent care benefits, your dollar limit for purposes of the credit may be reduced. See Reduced Dollar Limit, later. But, even if you can't take the credit, you may be able to take an exclusion or deduction for the dependent care benefits.
Dependent care benefits. Dependent care benefits include:
Your salary may have been reduced to pay for these benefits. If you received dependent care benefits as an employee, they should be shown in box 10 of your Form W-2, Wage and Tax Statement. See Statement for employee, later. Benefits you received as a partner should be shown in box 13 of your Schedule K-1 (Form 1065) with code O.
Enter the amount of these benefits on Form 2441, Part III, line 12.
Exclusion or deduction. If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Your employer can tell you whether your benefit plan qualifies. To claim the exclusion, you must complete Part III of Form 2441.
If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Therefore, you wouldn't get an exclusion from wages. Instead, you would get a deduction on Schedule C (Form 1040), line 14; Schedule E (Form 1040), line 19 or 28; or Schedule F (Form 1040), line 15. To claim the deduction, you must use Form 2441.
The amount you can exclude or deduct is limited to the smallest of:
1.-The total amount of dependent care benefits you received during the year,
2.-The total amount of qualified expenses you incurred during the year,
3.-Your earned income,
4.-Your spouse's earned income, or
5.-The maximum amount allowed under your dependent care plan. For 2021, the ARP increased the maximum amount that can be excluded from an employee's income through a dependent care assistance program to $10,500 ($5,250 if married filing separately). Unused amounts from 2020 are added to the maximum amount of dependent care benefits that are allowed for 2021. Your employer can tell you whether your dependent care plan was amended to increase the amount that can be excluded. For more information, see Notice 2021-26.
The definition of earned income for the exclusion or deduction is the same as the definition used when figuring the credit except that earned income for the exclusion or deduction doesn't include any dependent care benefits you receive.
Statement for employee. Your employer must give you a Form W-2 (or similar statement), showing in box 10 the total amount of dependent care benefits provided to you during the year under a qualified plan. Your employer will also include in your wages shown in box 1 of your Form W-2 any dependent care benefits that exceed the maximum amount of dependent care benefits allowed to be excluded for 2021. For 2021, the ARP increased to $10,500 (previously $5,000) the maximum amount that can be excluded from an employee's income through a dependent care assistance program. Your employer can tell you whether your dependent care plan was amended to increase the amount that can be excluded.
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