This tax form is really two forms in one. The first form is the child and dependent care credit, as advertised. The second form concerns the tax exemption for dependent care benefits paid by your employer.
The calculations on the two forms are interrelated (which is why the IRS glued the two forms together). The following lines will briefly describe the dependent care benefit calculation, then its relationship to the child and dependent care credit.
If your employer didn't pay any dependent care benefits on your behalf, you can skip the next few paragraphs; they won't affect you.
The dependent care benefit rules allow up to $5,000 of dependent care benefits to be excluded from taxation. (If not for this special provision, you would have to include the dependent care benefits in income.)
The bottom section of the form figures out how much of the dependent care benefits are exempt from taxation, and how much are taxable. The taxable amount carries to Form 1040. The exempt amount affects the child and dependent care credit. How? By reducing, dollar for dollar, the expenses that may be counted as child care expenses.
So, for example, if you had $3,000 of qualifying child care expenses and $2,000 of tax exempt dependent care benefits, you will be allowed to enter only $1,000 ($3,000 minus $2,000) on line 3.
There's another surprising effect. The exempt amount also reduces the maximum amount you can claim. So, for example, if you had $10,000 of qualifying child care expenses and $5,000 of dependent care benefits, the maximum qualifying expenses you can claim will be $1,000 ($6,000 minus $5,000).
This information carries from the Child/Dependent Care Worksheet. If you entered information about more than two care providers, instead of carrying the information we print "See Worksheet" on the top line of the chart, and you should attach the worksheet to your return.
This information carries from the Child/Dependent Care Worksheet. If you entered information about more than two qualifying persons, instead of carrying the information we print "See Worksheet" on the top line of the chart, and you should attach the worksheet to your return.
Your earned income on this line is calculated separately for yourself and your spouse as follows:
+ Wages from box 1 of this spouse's Form W-2's.
+ Other wage income for this spouse, from line 7a on Form 1040;
+ Net self-employment income or loss from Schedule SE for this spouse;
+ Gross receipts of statutory employees, from line 1 of Schedule C, for this spouse's Schedule C's, where the "Statutory Employee" box at line 1 is X'd;
+ Gross receipts of statutory employees, from line 1 of Schedule C-EZ, for this spouse's Schedule C-EZ, where the "Statutory Employee" box at line 1 is X'd;
+ Nontaxable earned income shown on the Child/Dependent Care Worksheet;
- 1/2 of Self-employment tax for this spouse, calculated as 1/2 of the amount on Schedule SE line B12.
- Scholarship income for this spouse, from the Attachments Worksheet.
This calculation of earned income does NOT include the "as if" earned income of students or disabled individuals. If you fall in this category, you should override our calculation to include that income.
Once the earned income figure is over $3,000 (if you have one qualifying child) or $6,000 (if you have more than one qualifying child), then the calculation is not affected by higher earned income amounts.
The "earned income" calculated here for line 4 is different from the "earned income" calculated for line 18 below.
We set this amount to zero if you are married filing separate returns unless you are treated as married for purposes of the credit.
If you entered an amount on line 9b, we carry that amount (not in excess of the amount shown on line 11) to the left of line 11.
This amount is carried from box 10 on Forms W-2 that are marked as "self," plus, if you are filing jointly, amounts from box 10 on W-2's that are marked as "spouse." We limit the amount carried from each Form W-2 to $5,000.
This calculation of your and your spouse's earned income is different from the calculation above on line 4.
The idea of this calculation is to get the same result, but without dependent care benefits. The way we achieve that effect is to start with the earned income number from line 4 above, then subtract the amount from the "other wage income" line of Form 1040, then add back all the components of that line other than dependent care benefits.
The amount on line 25 is the amount of dependent care benefit that is exempt from tax. This amount is the smallest of the following:
The amount of dependent care benefits you received (less forfeited amounts);
The qualifying child care expenses you had;
Your earned income;
If you are married, your spouse's earned income;
$5,000 (but if you are married filing separately, $2,500).
This amount will carry to Form 1040. We calculate the proportions for yourself and your spouse based on the "ownership" (self versus spouse) of the W-2's on which the dependent care benefits were reported.