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To claim the credit, you (and your spouse if you are married) must have earned income during the year.Earned income - Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages.
Generally, only taxable compensation is included. However, you can elect to include nontaxable combat pay in earned income.Members of certain religious faiths opposed to participation in Social Security Act programs and have an IRS-approved form that exempts certain income from social security and Medicare taxes may be able to include certain payments – See IRS Publications 503 and 517 to find out what is allowed.
Earned income does not include: Pensions and annuities, Social security and railroad retirement benefits, Workers' compensation, Interest and dividends, Unemployment compensation, Scholarships or fellowship grants, except for those reported on Form W-2 and paid to you for teaching or other services, Nontaxable workfare payments, Income of a nonresident alien that is not effectively connected with a U.S. trade or business, or Any amount received for work while an inmate in a penal institution.
Rule for student-spouse or spouse not able to care for self - Your spouse is treated as having earned income for any month that he or she is:
· A full-time student, or
· Physically or mentally not able to care for himself or herself. (Your spouse also must live with you for more than half the year.)
This rule applies to only one spouse for any one month. If, in the same month, both you and your spouse do not work and are either full-time students or physically or mentally not able to care for yourselves, only one of you can be treated as having earned income in that month.
Full-time student - You are a full-time student if you are enrolled at a school for the number of hours or classes that the school considers full time. You must have been a student for some part of each of 5 calendar months during the year. (The months need not be consecutive.)
School - The term “school” includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. A school does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.
Back to: Child and dependent care credit index
Other sections to read about child care credit: Child and Dependant Care Credit, Qualifying Person Test, Earned Income Test, Qualified Expenses, Child and Dependent care expenses - examples
Taken from IRS Publication 503 also see IRS Publication 501
