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 2000 work-related expenses, count only those you paid by December 31, 2000.

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 1999 expenses that you paid in 2000 as work-related expenses for 2000. You may be able to claim an additional credit for them on your 2000 return, but you must figure it separately. See Payments for previous year's expenses under Amount of Credit, later.

If you had expenses in 2000 that you did not pay until 2001, you cannot count them when figuring your 2000 credit. You may be able to claim a credit for them on your 2001 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. For information on medical expenses, see Publication 502, Medical and Dental Expenses.

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

Employer-Provided 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. If you received benefits, they should be shown on your Form W-2, Wage and Tax Statement. See Statement for employee, later.

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 (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 (flexible spending 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.

Effect of exclusion. 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 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.

Example. You remarried on December 3. Your earned income for the year was $18,000. Your new spouse's earned income for the year was $2,000. You paid work-related expenses of $3,000 for the care of your 5-year-old child and qualified to claim the credit. The amount of expenses you use to figure your credit cannot be more than $2,000 (the smaller of your earned income or that of your spouse).

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.

Self-employment earnings. If you are self-employed, include your net earnings in earned income. For purposes of the child and dependent care credit, net earnings from self-employment generally means the amount from line 3 of Schedule SE (either Section A or Section B) minus any deduction for self-employment tax on line 27 of Form 1040. Include your self-employment earnings in earned income, even if they are less than $400 and you did not file Schedule SE.

Statutory employee. If you filed Schedule C or C-EZ to report income as a statutory employee, also include as earned income the amount from line 1 of that Schedule C or C-EZ.

Net loss. You must reduce your earned income by any net loss from self-employment.

Optional method if earnings are low or a net loss. If your net earnings from self-employment are low or you have a net loss, you may be able to figure your net earnings by using an optional method instead of the regular method. Get Publication 533, Self-Employment Tax, for details. If you use an optional method to figure net earnings for self-employment tax purposes, include those net earnings in your earned income for this credit. In this case, subtract any deduction you claimed on Form 1040, line 27, from the total of the amounts on Schedule SE, Section B, lines 3 and 4b, to figure your net earnings.

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.

Example. Jim works and keeps up a home for himself and his wife Sharon. Because of an accident, Sharon is not able to care for herself for 11 months during the tax year.

During the 11 months, Jim pays $2,750 of work-related expenses for Sharon's care. These expenses also qualify as medical expenses. Their adjusted gross income is $29,000 and the entire amount is Jim's earned income.

Jim and Sharon's earned income limit is the smallest of the following amounts.

		Jim and Sharon's Earned Income Limit
	1)	Work-related expenses Jim paid	$ 2,750
	2)	Jim's earned income	$29,000
	3)	Income considered earned by Sharon   (11 x $200)	$ 2,200

Jim and Sharon can use $2,200 to figure the credit and treat the balance of $550 ($2,750 - $2,200) as a medical expense. However, if they use the $2,750 first as a medical expense, they cannot use any part of that amount to figure the credit.

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.

If you paid work-related expenses for the care of two or more qualifying persons, the $4,800 limit does not need to be divided equally among them. For example, if your work-related expenses for the care of one qualifying person are $2,000 and your work-related expenses for another qualifying person are $2,800, you can use the total, $4,800, when figuring the credit.

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.

Example. In July of this year, to permit your spouse to begin a new job, you enrolled your 3-year-old daughter in a nursery school that provides preschool child care. You paid $300 per month for the child care. You can use the full $1,800 you paid ($300 x 6 months) as qualified expenses since it is not more than the $2,400 yearly limit.

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-Provided 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 qualified 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.

IF your adjusted gross income is:		THEN the
Over	But not over	percentage is:
$    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%

Payments for previous year's expenses. If you had work-related expenses in 1999 that you paid in 2000, you may be able to increase the credit on your 2000 return. Attach a statement to your form showing how you figured the additional amount from 1999. Then above line 9 on Form 2441 or Schedule 2 (Form 1040A), write "PYE" and the amount of the credit. To the right of that amount, also write the name and taxpayer identification number of the person for whom you paid the prior year's expenses. Then add this credit to the amount on line 9, and replace the amount on line 9 with the total.

Use the following worksheet to figure the credit you may claim for 1999 expenses paid in 2000.
  

	Worksheet for 1999 Expenses Paid in 2000
1)	Enter your 1999 qualified expenses paid in 1999
2)	Enter your 1999 qualified expenses paid in 2000
3)	Add the amounts on lines 1 and 2
4)	Enter $2,400 if care was for one qualifying person ($4,800 if for two or more)
5)	Enter any dependent care benefits received for 1999 and excluded from your income (from line 18 of 1999 Form 2441 or Schedule 2 (Form 1040A))
6)	Subtract amount on line 5 from amount on line 4 and enter the result
7)	Compare your earned income for 1999 and your spouse's earned income for 1999 and enter the smaller amount
8)	Compare the amounts on lines 3, 6, and 7 and enter the smallest amount
9)	Enter the amount on which you figured the credit for 1999 (from line 6 of 1999 Form 2441 or Schedule 2 (Form 1040A))
10)	Subtract amount on line 9 from amount on line 8 and enter the result. If zero or less, stop here. You cannot increase your credit by any previous year's expenses
11)	Enter your 1999 adjusted gross income (from line 33 of your 1999 Form 1040 or line 18 of your 1999 Form 1040A)
12)	Find your 1999 adjusted gross income in the table of percentages (shown earlier) and enter the corresponding decimal amount here
13)	Multiply line 10 by line 12. Add this amount to your 2000 credit and enter the total on line 9 of your 2000 Form 2441 or Schedule 2 (Form 1040A). Above line 9, write "PYE," the amount of this credit, and the name and taxpayer identification number of the person for whom you paid the prior year's expenses

Example. In 1999, Sam and Kate had child-care expenses of $2,600 for their 12-year-old child. Of the $2,600, they paid $2,000 in 1999 and $600 in 2000. Their adjusted gross income for 1999 was $30,000. Sam's earned income of $14,000 was less than Kate's earned income. A credit for their 1999 expenses paid in 2000 is not allowed in 1999. It is allowed for the 2000 tax year, but they must use their adjusted gross income for 1999 to compute the amount. The worksheet they use to figure this credit is shown next.

Sam & Kate's Worksheet for 1999 Expenses Paid in 2000
1)	Enter your 1999 qualified expenses paid in 1999	$  2,000
2)	Enter your 1999 qualified expenses paid in 2000	600
3)	Add the amounts on lines 1 and 2	$  2,600
4)	Enter $2,400 if care was for one qualifying person ($4,800 if for two or more)	$  2,400
5)	Enter any dependent care benefits received for 1999 and excluded from your income (from line 18 of 1999 Form 2441 or Schedule 2 (Form 1040A))	0
6)	Subtract amount on line 5 from amount on line 4 and enter the result	$  2,400
7)	Compare your earned income for 1999 and your spouse's earned income for 1999 and enter the smaller amount	$14,000
8)	Compare the amounts on lines 3, 6, and 7 and enter the smallest amount	$  2,400
9)	Enter the amount on which you figured the credit for 1999 (from line 6 of 1999 Form 2441 or Schedule 2 (Form 1040A))	2,000
10)	Subtract amount on line 9 from amount on line 8 and enter the result. If zero or less, stop here. You cannot increase your credit by any previous year's expenses	400
11)	Enter your 1999 adjusted gross income (from line 33 of your 1999 Form 1040 or line 18 of your 1999 Form 1040A)	$30,000
12)	Find your 1999 adjusted gross income in the table of percentages (shown earlier) and enter the corresponding decimal amount here	.20
13)	Multiply line 10 by line 12. Add this amount to your 2000 credit and enter the total on line 9 of your 2000 Form 2441 or Schedule 2 (Form 1040A). Above line 9, write "PYE," the amount of this credit, and the name and taxpayer identification number of the person for whom you paid the prior year's expenses	$  80

Sam and Kate add the $80 from line 13 of this worksheet to their 2000 credit and enter the total on line 9 of their Schedule 2 (Form 1040A). They enter "PYE $80" and their child's name and SSN above line 9.

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