Earned Income Test

Another requirement for claiming the tax credit for child and dependent care is that you (and your spouse, if you're married) must have some earned income during the year. You can only claim child care expenses up to the amount of the lower of your income, or your spouse's earned income.

"Earned income" includes your net earnings from self-employment, wages, salaries, tips, other employee compensation, strike benefits, and any disability pay that is taxable as wages.

It does not include pensions, annuities, Social Security benefits, worker's compensation, interest, dividends, unemployment compensation, or scholarship or fellowship grants (except amounts paid for teaching, research, or other services).

Exception for disabled spouses or student-spouses. So long as one spouse is working, the other spouse may be a nonworking disabled person or a full-time student without losing the credit.

If this situation applies to you, the nonworking spouse will be treated as having earned $250 a month for one qualifying person, or $500 for more than one qualifying person, for every month in which the spouse was physically or mentally incapable of self-care or was a full-time student at an elementary school; junior or senior high school; college; university; or technical, trade, or professional school. This does not include night school or correspondence school. Therefore, if the nonworking spouse was a student or disabled for the entire year, you will be able to claim the maximum amount of expenses.

"Full-time student" means a person maintaining a schedule that is considered full-time by the institution attended, but the schedule must extend over some part of at least five months of the year.

This $250- or $500-per-month rule applies to only one spouse per month. If both you and your spouse are unemployed because each is either disabled or a full-time student (or for any other reason), you cannot claim dependent care expenses for the month because of the work-related expenses test.

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