Your credit is a percentage of your work-related expenses. Your expenses are subject to the earned income limit and the dollar limit. The percentage is based on your adjusted gross income.

Figuring Total Work-Related Expenses

To figure the credit for 1998 work-related expenses, count only those you paid by December 31, 1998.

Expenses prepaid in an earlier year. If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Claim the expenses for the later year as if they were actually paid in that later year.

Expenses not paid until the following year. Do not count 1997 expenses that you paid in 1998 as work-related expenses for 1998. You may be able to claim an additional credit for them on your 1998 return, but you must figure it separately. See Payments for previous year's expenses under Amount of Credit in Publication 503.

If you had expenses in 1998 that you did not pay until 1999, you cannot count them when figuring your 1998 credit. You may be able to claim a credit for them on your 1999 return.

Expenses reimbursed. If a state social services agency pays you a nontaxable amount to reimburse you for some of your child and dependent care expenses, you cannot count the expenses that are reimbursed as work-related expenses.

Example. You paid work-related expenses of $3,000. You are reimbursed $2,000 by a state social services agency. You can use only $1,000 to figure your credit.

Medical expenses. Some expenses for the care of qualifying persons who are not able to care for themselves may qualify as work-related expenses and also as medical expenses. You can use them either way, but you cannot use the same expenses to claim both a credit and a medical expense deduction.

If you use these expenses to figure the credit and they are more than the earned income limit or the dollar limit, discussed later, you can add the excess to your medical expenses. However, if you use your total expenses to figure your medical expense deduction, you cannot use any part of them to figure your credit.

Amounts excluded from your income under your employer's dependent care benefits plan cannot be used to claim a medical expense deduction.

Employer's Dependent Care Benefits

Dependent care benefits include:

1. Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and
2. The fair market value of care in a day-care facility provided or sponsored by your employer.

Your salary may have been reduced to pay for these benefits.

Exclusion. 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. If it does, you must complete Part III of either Form 2441 or Schedule 2 (Form 1040A) to claim the exclusion even if you cannot take the credit. You cannot use Form 1040EZ.

The amount you can exclude 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. $5,000 ($2,500 if married filing separately).

Statement for employee. Your employer must give you a Form W-2, Wage and Tax Statement (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 any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2.

Forfeitures. Forfeitures are amounts credited to your dependent care benefit account and included in the amount shown in box 10 of your Form W-2, but not received because you did not incur the expense. When figuring your exclusion, subtract any forfeitures from the total dependent care benefits reported by your employer. To do this, enter the forfeited amount on line 11 of Form 2441 or Schedule 2 (Form 1040A).

Forfeitures do not include amounts that you expect to receive in the future.

Claiming the credit. If you exclude dependent care benefits from your income, the amount of the excluded benefits:

1. Is not included in your work-related expenses, and
2. Reduces the dollar limit, discussed later.

Earned Income Limit

The amount of work-related expenses you use to figure your credit cannot be more than:

1. Your earned income for the year, if you are single at the end of the year, or
2. The smaller of your earned income or your spouse's earned income for the year, if you are married at the end of the year.

Earned income is defined under Earned Income Test, earlier.

For purposes of item (2), use your spouse's earned income for the entire year, even if you were married for only part of the year.

Separated spouse. If you are legally separated or married and living apart from your spouse (as described under Joint Return Test, earlier), you are 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 as a surviving spouse, you are not considered married for purposes of the earned income limit. Use only your income in figuring the earned income limit.

Community property laws. You should disregard community property laws when you figure earned income for this credit.

Student-spouse or spouse not able to care for self. Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. His or her earned income for each month is considered to be at least $200 if there is one qualifying person in your home, or at least $400 if there are 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 for himself 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 either full-time students or not able to care for yourselves, only one spouse can be considered to have this earned income of $200 (or $400) for that month.

Dollar Limit

There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $2,400 for one qualifying person, or $4,800 for two or more qualifying persons.

Yearly limit. The dollar limit is a yearly limit. The amount of the dollar limit remains the same no matter how long, during the year, you have a qualifying person in your household. Use the $2,400 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Use $4,800 if you paid work-related expenses for the care of more than one qualifying person at any time during the year.

Reduced Dollar Limit

If you received dependent care benefits from your employer that you exclude from your income, you must subtract that amount from the dollar limit that applies to you. Your reduced dollar limit is figured on lines 20 through 24 of Form 2441 or Schedule 2 (Form 1040A). See Employer's Dependent Care Benefits, earlier, for information on excluding these benefits.

Example. George is a widower with one child and earns $24,000 a year. He pays work-related expenses of $1,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. His employer pays an additional $1,000 under a dependent care benefit plan. This $1,000 is excluded from George's income.

Although the dollar limit for his work-related expenses is $2,400 (one qualifying person), George figures his credit on only $1,400 of the $1,900 work-related expenses he paid. This is because his dollar limit is reduced as shown next.

	George's Reduced Dollar Limit
1)	Maximum allowable expenses for one qualifying person	$2,400
2)	Minus: Dependent care benefits George 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-related expenses (after applying the earned income and dollar limits) by a percentage. This percentage depends on your adjusted gross income shown on line 34 of Form 1040 or line 19 of Form 1040A. The following table shows the percentage to use based on adjusted gross income.

Adjusted Gross Income			Percentage
		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%

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