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Free h&r block software 7. Free h&r block software   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Free h&r block software For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Free h&r block software There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Free h&r block software However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Free h&r block software See Contributions , later. Free h&r block software This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Free h&r block software What is the tax benefit of the Coverdell ESA. Free h&r block software   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Free h&r block software   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Free h&r block software See Tax-Free Distributions , later. Free h&r block software    Table 7-1 summarizes the main features of the Coverdell ESA. Free h&r block software Table 7-1. Free h&r block software Coverdell ESA at a Glance Do not rely on this table alone. Free h&r block software It provides only general highlights. Free h&r block software See the text for definitions of terms in bold type and for more complete explanations. Free h&r block software Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Free h&r block software Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Free h&r block software Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Free h&r block software Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Free h&r block software Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Free h&r block software What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Free h&r block software When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Free h&r block software To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Free h&r block software The document creating and governing the account must be in writing and must satisfy the following requirements. Free h&r block software The trustee or custodian must be a bank or an entity approved by the IRS. Free h&r block software The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Free h&r block software The contribution is in cash. Free h&r block software The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free h&r block software The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Free h&r block software Money in the account cannot be invested in life insurance contracts. Free h&r block software Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Free h&r block software The balance in the account generally must be distributed within 30 days after the earlier of the following events. Free h&r block software The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Free h&r block software The beneficiary's death. Free h&r block software Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Free h&r block software For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Free h&r block software Designated beneficiary. Free h&r block software   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Free h&r block software Contributions to a qualified tuition program (QTP). Free h&r block software   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Free h&r block software In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Free h&r block software See chapter 8, Qualified Tuition Program . Free h&r block software Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Free h&r block software Eligible postsecondary school. Free h&r block software   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free h&r block software S. Free h&r block software Department of Education. Free h&r block software It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free h&r block software The educational institution should be able to tell you if it is an eligible educational institution. Free h&r block software   Certain educational institutions located outside the United States also participate in the U. Free h&r block software S. Free h&r block software Department of Education's Federal Student Aid (FSA) programs. Free h&r block software Eligible elementary or secondary school. Free h&r block software   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free h&r block software Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Free h&r block software As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Free h&r block software The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Free h&r block software Tuition and fees. Free h&r block software Books, supplies, and equipment. Free h&r block software Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Free h&r block software Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Free h&r block software The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Free h&r block software The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Free h&r block software The actual amount charged if the student is residing in housing owned or operated by the school. Free h&r block software Half-time student. Free h&r block software   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Free h&r block software Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Free h&r block software As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Free h&r block software There are special rules for computer-related expenses. Free h&r block software The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Free h&r block software Tuition and fees. Free h&r block software Books, supplies, and equipment. Free h&r block software Academic tutoring. Free h&r block software Special needs services for a special needs beneficiary. Free h&r block software The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Free h&r block software Room and board. Free h&r block software Uniforms. Free h&r block software Transportation. Free h&r block software Supplementary items and services (including extended day programs). Free h&r block software The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Free h&r block software (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Free h&r block software ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Free h&r block software For individuals filing joint returns, that amount is $220,000. Free h&r block software Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Free h&r block software There is no requirement that an organization's income be below a certain level. Free h&r block software Contributions must meet all of the following requirements. Free h&r block software They must be in cash. Free h&r block software They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free h&r block software They must be made by the due date of the contributor's tax return (not including extensions). Free h&r block software Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Free h&r block software Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Free h&r block software Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Free h&r block software When contributions considered made. Free h&r block software   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Free h&r block software They must be made by the due date (not including extensions) for filing your return for the preceding year. Free h&r block software   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Free h&r block software Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Free h&r block software Limit for each designated beneficiary. Free h&r block software   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Free h&r block software This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Free h&r block software Rollovers are discussed under Rollovers and Other Transfers , later. Free h&r block software Example. Free h&r block software When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Free h&r block software In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Free h&r block software For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Free h&r block software Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Free h&r block software These contributions could be put into any of Maria's Coverdell ESA accounts. Free h&r block software Limit for each contributor. Free h&r block software   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Free h&r block software This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Free h&r block software Example. Free h&r block software The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Free h&r block software If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Free h&r block software Reduced limit. Free h&r block software   Your contribution limit may be reduced. Free h&r block software If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Free h&r block software If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Free h&r block software Table 7-2. Free h&r block software Coverdell ESA Contributions at a Glance Do not rely on this table alone. Free h&r block software It provides only general highlights. Free h&r block software See the text for more complete explanations. Free h&r block software Question Answer Are contributions deductible? No. Free h&r block software What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Free h&r block software What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Free h&r block software What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Free h&r block software Can contributions other than cash be made to a Coverdell ESA? No. Free h&r block software When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Free h&r block software Modified adjusted gross income (MAGI). Free h&r block software   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free h&r block software MAGI when using Form 1040A. Free h&r block software   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free h&r block software MAGI when using Form 1040. Free h&r block software   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free h&r block software MAGI when using Form 1040NR. Free h&r block software   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Free h&r block software MAGI when using Form 1040NR-EZ. Free h&r block software   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Free h&r block software   If you have any of these adjustments, you can use Worksheet 7-1. Free h&r block software MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Free h&r block software Worksheet 7-1. Free h&r block software MAGI for a Coverdell ESA 1. Free h&r block software Enter your adjusted gross income  (Form 1040, line 38)   1. Free h&r block software   2. Free h&r block software Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free h&r block software       3. Free h&r block software Enter your foreign housing deduction (Form 2555, line 50)   3. Free h&r block software         4. Free h&r block software Enter the amount of income from Puerto Rico you are excluding   4. Free h&r block software       5. Free h&r block software Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free h&r block software       6. Free h&r block software Add lines 2, 3, 4, and 5   6. Free h&r block software   7. Free h&r block software Add lines 1 and 6. Free h&r block software This is your  modified adjusted gross income   7. Free h&r block software   Figuring the limit. Free h&r block software    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Free h&r block software The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Free h&r block software The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Free h&r block software Subtract the result from $2,000. Free h&r block software This is the amount you can contribute for each beneficiary. Free h&r block software You can use Worksheet 7-2. Free h&r block software Coverdell ESA Contribution Limit to figure the limit on contributions. Free h&r block software    Worksheet 7-2. Free h&r block software Coverdell ESA Contribution Limit 1. Free h&r block software Maximum contribution   1. Free h&r block software $2,000 2. Free h&r block software Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free h&r block software   3. Free h&r block software Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free h&r block software   4. Free h&r block software Subtract line 3 from line 2. Free h&r block software If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free h&r block software   5. Free h&r block software Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free h&r block software     Note. Free h&r block software If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Free h&r block software You are not allowed to contribute to a Coverdell ESA for 2013. Free h&r block software       6. Free h&r block software Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free h&r block software . Free h&r block software 7. Free h&r block software Multiply line 1 by line 6   7. Free h&r block software   8. Free h&r block software Subtract line 7 from line 1   8. Free h&r block software   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free h&r block software Example. Free h&r block software Paul, who is single, had a MAGI of $96,500 for 2013. Free h&r block software Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Free h&r block software Worksheet 7-2. Free h&r block software Coverdell ESA Contribution Limit—Illustrated 1. Free h&r block software Maximum contribution   1. Free h&r block software $2,000 2. Free h&r block software Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free h&r block software 96,500 3. Free h&r block software Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free h&r block software 95,000 4. Free h&r block software Subtract line 3 from line 2. Free h&r block software If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free h&r block software 1,500 5. Free h&r block software Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free h&r block software 15,000   Note. Free h&r block software If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Free h&r block software You are not allowed to  contribute to a Coverdell ESA for 2013. Free h&r block software       6. Free h&r block software Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free h&r block software . Free h&r block software 100 7. Free h&r block software Multiply line 1 by line 6   7. Free h&r block software 200 8. Free h&r block software Subtract line 7 from line 1   8. Free h&r block software 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free h&r block software Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Free h&r block software Excess contributions are the total of the following two amounts. Free h&r block software Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Free h&r block software Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Free h&r block software Exceptions. Free h&r block software   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Free h&r block software   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Free h&r block software You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Free h&r block software Box 2 of that form will show the amount of earnings on your excess contributions. Free h&r block software Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Free h&r block software See Instructions for Recipient on the back of copy B of your Form 1099-Q. Free h&r block software Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Free h&r block software For more information, see Taxable Distributions , later. Free h&r block software   The excise tax does not apply to any rollover contribution. Free h&r block software Note. Free h&r block software Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Free h&r block software Example. Free h&r block software In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Free h&r block software Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Free h&r block software In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Free h&r block software Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Free h&r block software (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Free h&r block software Figuring and reporting the additional tax. Free h&r block software   You figure this excise tax in Part V of Form 5329. Free h&r block software Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Free h&r block software Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Free h&r block software The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Free h&r block software Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Free h&r block software This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free h&r block software An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Free h&r block software Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Free h&r block software These are not taxable distributions. Free h&r block software Members of the beneficiary's family. Free h&r block software   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Free h&r block software Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Free h&r block software Brother, sister, stepbrother, or stepsister. Free h&r block software Father or mother or ancestor of either. Free h&r block software Stepfather or stepmother. Free h&r block software Son or daughter of a brother or sister. Free h&r block software Brother or sister of father or mother. Free h&r block software Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free h&r block software The spouse of any individual listed above. Free h&r block software First cousin. Free h&r block software Example. Free h&r block software When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Free h&r block software He wanted to give this money to his younger sister, who was still in high school. Free h&r block software In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Free h&r block software Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Free h&r block software This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Free h&r block software Military death gratuity. Free h&r block software   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Free h&r block software Such payments are made to an eligible survivor upon the death of a member of the armed forces. Free h&r block software The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Free h&r block software   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Free h&r block software The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Free h&r block software   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Free h&r block software See Distributions , later. Free h&r block software The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Free h&r block software Changing the Designated Beneficiary The designated beneficiary can be changed. Free h&r block software See Members of the beneficiary's family , earlier. Free h&r block software There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Free h&r block software Example. Free h&r block software Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Free h&r block software Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Free h&r block software Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Free h&r block software After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Free h&r block software Example. Free h&r block software In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Free h&r block software In this process, the account was transferred into her name. Free h&r block software Peg now treats the funds in this Coverdell ESA as if she were the original owner. Free h&r block software Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Free h&r block software Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Free h&r block software See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Free h&r block software Table 7-3. Free h&r block software Coverdell ESA Distributions at a Glance Do not rely on this table alone. Free h&r block software It provides only general highlights. Free h&r block software See the text for definitions of terms in bold type and for more complete explanations. Free h&r block software Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Free h&r block software After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Free h&r block software Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Free h&r block software Also, certain transfers to members of the beneficiary's family are permitted. Free h&r block software Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Free h&r block software Adjusted qualified education expenses. Free h&r block software   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Free h&r block software Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free h&r block software The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Free h&r block software Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Free h&r block software Do not report tax-free distributions (including qualifying rollovers) on your tax return. Free h&r block software Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Free h&r block software Excess distribution. Free h&r block software   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Free h&r block software Earnings and basis. Free h&r block software   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Free h&r block software The amount of your gross distribution will be shown in box 1. Free h&r block software For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Free h&r block software This will be shown in the blank box below boxes 5 and 6. Free h&r block software   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Free h&r block software Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Free h&r block software Figure the taxable portion for 2013 as shown in the following steps. Free h&r block software Multiply the total amount distributed by a fraction. Free h&r block software The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Free h&r block software Subtract the amount figured in (1) from the total amount distributed during 2013. Free h&r block software The result is the amount of earnings included in the distribution(s). Free h&r block software Multiply the amount of earnings figured in (2) by a fraction. Free h&r block software The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Free h&r block software Subtract the amount figured in (3) from the amount figured in (2). Free h&r block software The result is the amount the beneficiary must include in income. Free h&r block software The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Free h&r block software Example. Free h&r block software You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Free h&r block software There were no contributions in 2013. Free h&r block software This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Free h&r block software The value (balance) of your account on December 31, 2013, was $950. Free h&r block software You had $700 of adjusted qualified education expenses (AQEE) for the year. Free h&r block software Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Free h&r block software   1. Free h&r block software $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Free h&r block software $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Free h&r block software $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Free h&r block software $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Free h&r block software Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Free h&r block software Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Free h&r block software Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Free h&r block software This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Free h&r block software Example. Free h&r block software Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Free h&r block software He paid his college expenses from the following sources. Free h&r block software     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Free h&r block software Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Free h&r block software Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Free h&r block software     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Free h&r block software The balance in Derek's account was $1,800 on December 31, 2013. Free h&r block software Prior to 2013, $2,100 had been contributed to this account. Free h&r block software Contributions for 2013 totaled $400. Free h&r block software Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Free h&r block software   1. Free h&r block software $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Free h&r block software $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Free h&r block software $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Free h&r block software $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Free h&r block software This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Free h&r block software Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Free h&r block software The following two examples illustrate possible allocations. Free h&r block software Example 1. Free h&r block software In 2013, Beatrice graduated from high school and began her first semester of college. Free h&r block software That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Free h&r block software To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Free h&r block software No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Free h&r block software She did not receive any tax-free educational assistance in 2013. Free h&r block software Beatrice must allocate her total qualified education expenses between the two distributions. Free h&r block software Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Free h&r block software The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Free h&r block software Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Free h&r block software She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Free h&r block software Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Free h&r block software (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Free h&r block software ) Example 2. Free h&r block software Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Free h&r block software In this case, she allocates her qualified education expenses as follows. Free h&r block software Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Free h&r block software Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Free h&r block software   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Free h&r block software See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Free h&r block software   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Free h&r block software The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Free h&r block software However, you do not have to allocate your expenses in the same way. Free h&r block software You can use any reasonable method. Free h&r block software Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Free h&r block software You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Free h&r block software Your basis is the total amount of contributions to that Coverdell ESA. Free h&r block software You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Free h&r block software If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Free h&r block software ) from all such accounts in order to determine your taxable earnings for the year. Free h&r block software By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Free h&r block software For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Free h&r block software Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Free h&r block software Exceptions. Free h&r block software   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Free h&r block software Made because the designated beneficiary is disabled. Free h&r block software A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Free h&r block software A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Free h&r block software Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free h&r block software Made on account of the attendance of the designated beneficiary at a U. Free h&r block software S. Free h&r block software military academy (such as the USMA at West Point). Free h&r block software This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Free h&r block software S. Free h&r block software Code) attributable to such attendance. Free h&r block software Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Free h&r block software Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Free h&r block software The distributed earnings must be included in gross income for the year in which the excess contribution was made. Free h&r block software Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Free h&r block software Figuring the additional tax. Free h&r block software    Use Part II of Form 5329, to figure any additional tax. Free h&r block software Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Free h&r block software When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Free h&r block software The designated beneficiary reaches age 30. Free h&r block software In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Free h&r block software However, this rule does not apply if the beneficiary is a special needs beneficiary. Free h&r block software The designated beneficiary dies before reaching age 30. Free h&r block software In this case, the remaining assets must generally be distributed within 30 days after the date of death. Free h&r block software Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Free h&r block software (“Family member” was defined earlier under Rollovers . Free h&r block software ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Free h&r block software This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free h&r block software There are no tax consequences as a result of the transfer. Free h&r block software How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Free h&r block software You determine these earnings as shown in the following two steps. Free h&r block software Multiply the amount distributed by a fraction. Free h&r block software The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Free h&r block software Subtract the amount figured in (1) from the total amount distributed during 2013. Free h&r block software The result is the amount of earnings included in the distribution. Free h&r block software For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Free h&r block software The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Free h&r block software Worksheet 7-3 Instructions. Free h&r block software Coverdell ESA—Taxable Distributions and Basis Line G. Free h&r block software Enter the total distributions received from all Coverdell ESAs during 2013. Free h&r block software Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Free h&r block software Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Free h&r block software Line 2. Free h&r block software Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Free h&r block software   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Free h&r block software For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Free h&r block software For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Free h&r block software You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Free h&r block software Line 4. Free h&r block software Enter the total distributions received from this Coverdell ESA in 2013. Free h&r block software Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Free h&r block software   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Free h&r block software Line 7. Free h&r block software Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Free h&r block software A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Free h&r block software   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Free h&r block software An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Free h&r block software Worksheet 7-3. Free h&r block software Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Free h&r block software • • • Complete Part I, lines A through H, on only one worksheet. Free h&r block software  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Free h&r block software  Complete Part III, the Summary (line 16), on only one worksheet. Free h&r block software Part I. Free h&r block software Qualified Education Expenses (Complete for total expenses)       A. Free h&r block software Enter your total qualified education expenses for 2013   A. Free h&r block software   B. Free h&r block software Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Free h&r block software         C. Free h&r block software Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Free h&r block software Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Free h&r block software         D. Free h&r block software Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Free h&r block software         E. Free h&r block software Add lines B, C, and D   D. Free h&r block software   F. Free h&r block software Subtract line E from line A. Free h&r block software This is your adjusted qualified education expense for 2013   E. Free h&r block software   G. Free h&r block software Enter your total distributions from all Coverdell ESAs during 2013. Free h&r block software Do not include rollovers  or the return of excess contributions (see instructions)   F. Free h&r block software   H. Free h&r block software Divide line F by line G. Free h&r block software Enter the result as a decimal (rounded to at least 3 places). Free h&r block software If the  result is 1. Free h&r block software 000 or more, enter 1. Free h&r block software 000   G. Free h&r block software . Free h&r block software Part II. Free h&r block software Taxable Distributions and Basis (Complete separately for each account) 1. Free h&r block software Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Free h&r block software Do not include rollovers or the return of excess contributions   1. Free h&r block software   2. Free h&r block software Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Free h&r block software   3. Free h&r block software Add lines 1 and 2   3. Free h&r block software   4. Free h&r block software Enter the total distributions from this Coverdell ESA during 2013. Free h&r block software Do not include rollovers  or the return of excess contributions (see instructions)   4. Free h&r block software   5. Free h&r block software Multiply line 4 by line H. Free h&r block software This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Free h&r block software         6. Free h&r block software Subtract line 5 from line 4   6. Free h&r block software         7. Free h&r block software Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Free h&r block software         8. Free h&r block software Add lines 4 and 7   8. Free h&r block software         9. Free h&r block software Divide line 3 by line 8. Free h&r block software Enter the result as a decimal (rounded to  at least 3 places). Free h&r block software If the result is 1. Free h&r block software 000 or more, enter 1. Free h&r block software 000   9. Free h&r block software . Free h&r block software       10. Free h&r block software Multiply line 4 by line 9. Free h&r block software This is the amount of basis allocated to your  distributions, and is tax free   10. Free h&r block software     Note. Free h&r block software If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Free h&r block software       11. Free h&r block software Subtract line 10 from line 4   11. Free h&r block software   12. Free h&r block software Divide line 5 by line 4. Free h&r block software Enter the result as a decimal (rounded to  at least 3 places). Free h&r block software If the result is 1. Free h&r block software 000 or more, enter 1. Free h&r block software 000   12. Free h&r block software . Free h&r block software       13. Free h&r block software Multiply line 11 by line 12. Free h&r block software This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Free h&r block software   14. Free h&r block software Subtract line 13 from line 11. Free h&r block software This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Free h&r block software   15. Free h&r block software Subtract line 10 from line 3. Free h&r block software This is your basis in this Coverdell ESA as of December 31, 2013   15. Free h&r block software   Part III. Free h&r block software Summary (Complete only once)       16. Free h&r block software Taxable amount. Free h&r block software Add together all amounts on line 14 for all your Coverdell ESAs. Free h&r block software Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Free h&r block software   Prev  Up  Next   Home   More Online Publications
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Elder Abuse and Neglect

If you or someone you know is being abused or neglected, contact the National Center on Elder Abuse.

The Free H&r Block Software

Free h&r block software Publication 503 - Main Content Table of Contents Tests To Claim the CreditQualifying Person Test Earned Income Test Work-Related Expense Test Joint Return Test Provider Identification Test How To Figure the CreditFiguring Total Work-Related Expenses Earned Income Limit Dollar Limit Amount of Credit How To Claim the CreditTax credit not refundable. Free h&r block software Employment Taxes for Household Employers How To Get Tax HelpLow Income Taxpayer Clinics Tests To Claim the Credit To be able to claim the credit for child and dependent care expenses, you must file Form 1040, Form 1040A, or Form 1040NR, not Form 1040EZ or Form 1040NR-EZ, and meet all the following tests. Free h&r block software The care must be for one or more qualifying persons who are identified on Form 2441. Free h&r block software (See Qualifying Person Test. Free h&r block software ) You (and your spouse if filing jointly) must have earned income during the year. Free h&r block software (However, see Rule for student-spouse or spouse not able to care for self under Earned Income Test, later. Free h&r block software ) You must pay child and dependent care expenses so you (and your spouse if filing jointly) can work or look for work. Free h&r block software (See Work-Related Expense Test, later. Free h&r block software ) You must make payments for child and dependent care to someone you (and your spouse) cannot claim as a dependent. Free h&r block software If you make payments to your child, he or she cannot be your dependent and must be age 19 or older by the end of the year. Free h&r block software You cannot make payments to: Your spouse, or The parent of your qualifying person if your qualifying person is your child and under age 13. Free h&r block software See Payments to Relatives or Dependents under Work-Related Expense Test, later. Free h&r block software Your filing status may be single, head of household, or qualifying widow(er) with dependent child. Free h&r block software If you are married, you must file a joint return, unless an exception applies to you. Free h&r block software See Joint Return Test, later. Free h&r block software You must identify the care provider on your tax return. Free h&r block software (See Provider Identification Test, later. Free h&r block software ) If you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). Free h&r block software (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the total amount you can exclude or deduct is limited to $5,000. Free h&r block software See Reduced Dollar Limit under How To Figure the Credit, later. Free h&r block software ) These tests are presented in Figure A and are also explained in detail in this publication. Free h&r block software Qualifying Person Test Your child and dependent care expenses must be for the care of one or more qualifying persons. Free h&r block software A qualifying person is: Your qualifying child who is your dependent and who was under age 13 when the care was provided (but see Child of divorced or separated parents or parents living apart , later), Your spouse who was not physically or mentally able to care for himself or herself and lived with you for more than half the year, or A person who was not physically or mentally able to care for himself or herself, lived with you for more than half the year, and either: Was your dependent, or Would have been your dependent except that: He or she received gross income of $3,900 or more, He or she filed a joint return, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. Free h&r block software Dependent defined. Free h&r block software   A dependent is a person, other than you or your spouse, for whom you can claim an exemption. Free h&r block software To be your dependent, a person must be your qualifying child (or your qualifying relative). Free h&r block software Qualifying child. Free h&r block software   To be your qualifying child, a child must live with you for more than half the year and meet other requirements. Free h&r block software More information. Free h&r block software   For more information about who is a dependent or a qualifying child, see Publication 501. Free h&r block software Physically or mentally not able to care for oneself. Free h&r block software   Persons who cannot dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. Free h&r block software Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves. Free h&r block software Person qualifying for part of year. Free h&r block software   You determine a person's qualifying status each day. Free h&r block software For example, if the person for whom you pay child and dependent care expenses no longer qualifies on September 16, count only those expenses through September 15. Free h&r block software Also see Yearly limit under Dollar Limit, later. Free h&r block software Birth or death of otherwise qualifying person. Free h&r block software   In determining whether a person is a qualifying person, a person who was born or died in 2013 is treated as having lived with you for more than half of 2013 if your home was the person's home more than half the time he or she was alive in 2013. Free h&r block software Taxpayer identification number. Free h&r block software   You must include on your return the name and taxpayer identification number (generally the social security number) of the qualifying person(s). Free h&r block software If the correct information is not shown, the credit may be reduced or disallowed. Free h&r block software Individual taxpayer identification number (ITIN) for aliens. Free h&r block software   If your qualifying person is a nonresident or resident alien who does not have and cannot get a social security number (SSN), use that person's ITIN. Free h&r block software The ITIN is entered wherever an SSN is requested on a tax return. Free h&r block software If the alien does not have an ITIN, he or she must apply for one. Free h&r block software See Form W-7, Application for IRS Individual Taxpayer Identification Number, for details. Free h&r block software   An ITIN is for tax use only. Free h&r block software It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U. Free h&r block software S. Free h&r block software law. Free h&r block software Adoption taxpayer identification number (ATIN). Free h&r block software   If your qualifying person is a child who was placed in your home for adoption and for whom you do not have an SSN, you must get an ATIN for the child. Free h&r block software File Form W-7A, Application for Taxpayer Identification Number for Pending U. Free h&r block software S. Free h&r block software Adoptions. Free h&r block software Child of divorced or separated parents or parents living apart. Free h&r block software   Even if you cannot claim your child as a dependent, he or she is treated as your qualifying person if: The child was under age 13 or was not physically or mentally able to care for himself or herself, The child received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year, The child was in the custody of one or both parents for more than half the year, and You were the child's custodial parent. Free h&r block software   The custodial parent is the parent with whom the child lived for the greater number of nights in 2013. Free h&r block software If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. Free h&r block software For details and an exception for a parent who works at night, see Publication 501. Free h&r block software   The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the child as a dependent under the special rules for a child of divorced or separated parents. Free h&r block software Please click here for the text description of the image. Free h&r block software Figure a. Free h&r block software Can you claim the credit Earned Income Test To claim the credit, you (and your spouse if filing jointly) must have earned income during the year. Free h&r block software Earned income. Free h&r block software   Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. Free h&r block software A net loss from self-employment reduces earned income. Free h&r block software Earned income also includes strike benefits and any disability pay you report as wages. Free h&r block software   Generally, only taxable compensation is included. Free h&r block software However, you can elect to include nontaxable combat pay in earned income. Free h&r block software If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. Free h&r block software (In other words, if one of you makes the election, the other one can also make it but does not have to. Free h&r block software ) Including this income will give you a larger credit only if your (or your spouse's) other earned income is less than the amount entered on line 3 of Form 2441. Free h&r block software You should figure your credit both ways and make the election if it gives you a greater tax benefit. Free h&r block software    You can choose to include your nontaxable combat pay in earned income when figuring your credit for child and dependent care expenses, even if you choose not to include it in earned income for the earned income credit or the exclusion or deduction for dependent care benefits. Free h&r block software Members of certain religious faiths opposed to social security. Free h&r block software   This section is for persons who are members of certain religious faiths that are opposed to participation in Social Security Act programs and have an IRS-approved form that exempts certain income from social security and Medicare taxes. Free h&r block software These forms are: Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, and Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits, for use by members of recognized religious groups. Free h&r block software   Each form is discussed here in terms of what is or is not earned income for purposes of the child and dependent care credit. Free h&r block software For information on the use of these forms, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Free h&r block software Form 4361. Free h&r block software   Whether or not you have an approved Form 4361, amounts you received for performing ministerial duties as an employee are earned income. Free h&r block software This includes wages, salaries, tips, and other taxable employee compensation. Free h&r block software   However, amounts you received for ministerial duties, but not as an employee, do not count as earned income. Free h&r block software Examples include fees for performing marriages and honoraria for delivering speeches. Free h&r block software   Any amount you received for work that is not related to your ministerial duties is earned income. Free h&r block software Form 4029. Free h&r block software   Whether or not you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation are earned income. Free h&r block software   However, amounts you received as a self-employed individual do not count as earned income. Free h&r block software What is not earned income?   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, Child support payments received, Income of a nonresident alien that is not effectively connected with a U. Free h&r block software S. Free h&r block software trade or business, or Any amount received for work while an inmate in a penal institution. Free h&r block software Rule for student-spouse or spouse not able to care for self. Free h&r block software   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. Free h&r block software (Your spouse also must live with you for more than half the year. Free h&r block software )   If you are filing a joint return, this rule also applies to you. Free h&r block software You can be treated as having earned income for any month you are a full-time student or not able to care for yourself. Free h&r block software   Figure the earned income of the nonworking spouse, described under (1) or (2) above, as shown under Earned Income Limit under How To Figure the Credit, later. Free h&r block software   This rule applies to only one spouse for any one month. Free h&r block software If, in the same month, both you and your spouse do not work and are either full-time students or not physically or mentally able to care for yourselves, only one of you can be treated as having earned income in that month. Free h&r block software Full-time student. Free h&r block software    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. Free h&r block software You must have been a full-time student for some part of each of 5 calendar months during the year. Free h&r block software (The months need not be consecutive. Free h&r block software ) School. Free h&r block software   The term “school” includes high schools, colleges, universities, and technical, trade, and mechanical schools. Free h&r block software A school does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Free h&r block software Work-Related Expense Test Child and dependent care expenses must be work-related to qualify for the credit. Free h&r block software Expenses are considered work-related only if both of the following are true. Free h&r block software They allow you (and your spouse if filing jointly) to work or look for work. Free h&r block software They are for a qualifying person's care. Free h&r block software Working or Looking for Work To be work-related, your expenses must allow you to work or look for work. Free h&r block software If you are married, generally both you and your spouse must work or look for work. Free h&r block software One spouse is treated as working during any month he or she is a full-time student or is not physically or mentally able to care for himself or herself. Free h&r block software Your work can be for others or in your own business or partnership. Free h&r block software It can be either full time or part time. Free h&r block software Work also includes actively looking for work. Free h&r block software However, if you do not find a job and have no earned income for the year, you cannot take this credit. Free h&r block software See Earned Income Test, earlier. Free h&r block software An expense is not considered work-related merely because you had it while you were working. Free h&r block software The purpose of the expense must be to allow you to work. Free h&r block software Whether your expenses allow you to work or look for work depends on the facts. Free h&r block software Example 1. Free h&r block software The cost of a babysitter while you and your spouse go out to eat is not normally a work-related expense. Free h&r block software Example 2. Free h&r block software You work during the day. Free h&r block software Your spouse works at night and sleeps during the day. Free h&r block software You pay for care of your 5-year-old child during the hours when you are working and your spouse is sleeping. Free h&r block software Your expenses are considered work-related. Free h&r block software Volunteer work. Free h&r block software   For this purpose, you are not considered to be working if you do unpaid volunteer work or volunteer work for a nominal salary. Free h&r block software Work for part of year. Free h&r block software   If you work or actively look for work during only part of the period covered by the expenses, then you must figure your expenses for each day. Free h&r block software For example, if you work all year and pay care expenses of $250 a month ($3,000 for the year), all the expenses are work related. Free h&r block software However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $250 a month, your work-related expenses are limited to $625 (2½ months × $250). Free h&r block software Temporary absence from work. Free h&r block software   You do not have to figure your expenses for each day during a short, temporary absence from work, such as for vacation or a minor illness, if you have to pay for care anyway. Free h&r block software Instead, you can figure your credit including the expenses you paid for the period of absence. Free h&r block software   An absence of 2 weeks or less is a short, temporary absence. Free h&r block software An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances. Free h&r block software Example. Free h&r block software You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. Free h&r block software You become ill and miss 4 months of work but receive sick pay. Free h&r block software You continue to pay the nanny to care for the children while you are ill. Free h&r block software Your absence is not a short, temporary absence, and your expenses are not considered work-related. Free h&r block software Part-time work. Free h&r block software   If you work part-time, you generally must figure your expenses for each day. Free h&r block software However, if you have to pay for care weekly, monthly, or in another way that includes both days worked and days not worked, you can figure your credit including the expenses you paid for days you did not work. Free h&r block software Any day when you work at least 1 hour is a day of work. Free h&r block software Example 1. Free h&r block software You work 3 days a week. Free h&r block software While you work, your 6-year-old child attends a dependent care center, which complies with all state and local regulations. Free h&r block software You can pay the center $150 for any 3 days a week or $250 for 5 days a week. Free h&r block software Your child attends the center 5 days a week. Free h&r block software Your work-related expenses are limited to $150 a week. Free h&r block software Example 2. Free h&r block software The facts are the same as in Example 1 except the center does not offer a 3-day option. Free h&r block software The entire $250 weekly fee may be a work-related expense. Free h&r block software Care of a Qualifying Person To be work-related, your expenses must be to provide care for a qualifying person. Free h&r block software You do not have to choose the least expensive way of providing the care. Free h&r block software The cost of a paid care provider may be an expense for the care of a qualifying person even if another care provider is available at no cost. Free h&r block software Expenses are for the care of a qualifying person only if their main purpose is the person's well-being and protection. Free h&r block software Expenses for household services qualify if part of the services is for the care of qualifying persons. Free h&r block software See Household Services, later. Free h&r block software Expenses not for care. Free h&r block software   Expenses for care do not include amounts you pay for food, lodging, clothing, education, and entertainment. Free h&r block software However, you can include small amounts paid for these items if they are incidental to and cannot be separated from the cost of caring for the qualifying person. Free h&r block software Otherwise, see the discussion of Expenses partly work-related, later. Free h&r block software   Child support payments are not for care and do not qualify for the credit. Free h&r block software Education. Free h&r block software   Expenses for a child in nursery school, preschool, or similar programs for children below the level of kindergarten are expenses for care. Free h&r block software   Expenses to attend kindergarten or a higher grade are not expenses for care. Free h&r block software Do not use these expenses to figure your credit. Free h&r block software   However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care. Free h&r block software   Summer school and tutoring programs are not for care. Free h&r block software Example 1. Free h&r block software You take your 3-year-old child to a nursery school that provides lunch and a few educational activities as part of its preschool childcare service. Free h&r block software The lunch and educational activities are incidental to the childcare, and their cost cannot be separated from the cost of care. Free h&r block software You can count the total cost when you figure the credit. Free h&r block software Example 2. Free h&r block software You place your 10-year-old child in a boarding school so you can work full time. Free h&r block software Only the part of the boarding school expense that is for the care of your child is a work-related expense. Free h&r block software You can count that part of the expense in figuring your credit if it can be separated from the cost of education. Free h&r block software You cannot count any part of the amount you pay the school for your child's education. Free h&r block software Care outside your home. Free h&r block software   You can count the cost of care provided outside your home if the care is for your dependent under age 13 or any other qualifying person who regularly spends at least 8 hours each day in your home. Free h&r block software Dependent care center. Free h&r block software   You can count care provided outside your home by a dependent care center only if the center complies with all state and local regulations that apply to these centers. Free h&r block software   A dependent care center is a place that provides care for more than six persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit. Free h&r block software Camp. Free h&r block software   The cost of sending your child to an overnight camp is not considered a work-related expense. Free h&r block software    The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer. Free h&r block software Transportation. Free h&r block software   If a care provider takes a qualifying person to or from a place where care is provided, that transportation is for the care of the qualifying person. Free h&r block software This includes transportation by bus, subway, taxi, or private car. Free h&r block software However, transportation not provided by a care provider is not for the care of a qualifying person. Free h&r block software Also, if you pay the transportation cost for the care provider to come to your home, that expense is not for care of a qualifying person. Free h&r block software Fees and deposits. Free h&r block software   Fees you paid to an agency to get the services of a care provider, deposits you paid to an agency or preschool, application fees, and other indirect expenses are work-related expenses if you have to pay them to get care, even though they are not directly for care. Free h&r block software However, a forfeited deposit is not for the care of a qualifying person if care is not provided. Free h&r block software Example 1. Free h&r block software You paid a fee to an agency to get the services of the nanny who cares for your 2-year-old daughter while you work. Free h&r block software The fee you paid is a work-related expense. Free h&r block software Example 2. Free h&r block software You placed a deposit with a preschool to reserve a place for your 3-year-old child. Free h&r block software You later sent your child to a different preschool and forfeited the deposit. Free h&r block software The forfeited deposit is not for care and so is not a work-related expense. Free h&r block software Household Services Expenses you pay for household services meet the work-related expense test if they are at least partly for the well-being and protection of a qualifying person. Free h&r block software Definition. Free h&r block software   Household services are ordinary and usual services done in and around your home that are necessary to run your home. Free h&r block software They include the services of a housekeeper, maid, or cook. Free h&r block software However, they do not include the services of a chauffeur, bartender, or gardener. Free h&r block software Housekeeper. Free h&r block software   In this publication, the term housekeeper refers to any household employee whose services include the care of a qualifying person. Free h&r block software Expenses partly work-related. Free h&r block software   If part of an expense is work-related (for either household services or the care of a qualifying person) and part is for other purposes, you have to divide the expense. Free h&r block software To figure your credit, count only the part that is work-related. Free h&r block software However, you do not have to divide the expense if only a small part is for other purposes. Free h&r block software Example. Free h&r block software You pay a housekeeper to care for your 9-year-old and 15-year-old children so you can work. Free h&r block software The housekeeper spends most of the time doing normal household work and spends 30 minutes a day driving you to and from work. Free h&r block software You do not have to divide the expenses. Free h&r block software You can treat the entire expense of the housekeeper as work-related because the time spent driving is minimal. Free h&r block software Nor do you have to divide the expenses between the two children, even though the expenses are partly for the 15-year-old child who is not a qualifying person, because the expense is also partly for the care of your 9-year-old child, who is a qualifying person. Free h&r block software However, the dollar limit (discussed later) is based on one qualifying person, not two. Free h&r block software Meals and lodging provided for housekeeper. Free h&r block software   If you have expenses for meals that your housekeeper eats in your home because of his or her employment, count these as work-related expenses. Free h&r block software If you have extra expenses for providing lodging in your home to the housekeeper, count these as work-related expenses also. Free h&r block software Example. Free h&r block software To provide lodging to the housekeeper, you move to an apartment with an extra bedroom. Free h&r block software You can count the extra rent and utility expenses for the housekeeper's bedroom as work-related. Free h&r block software However, if your housekeeper moves into an existing bedroom in your home, you can count only the extra utility expenses as work-related. Free h&r block software Taxes paid on wages. Free h&r block software   The taxes you pay on wages for qualifying child and dependent care services are work-related expenses. Free h&r block software For more information on a household employer's tax responsibilities, see Employment Taxes for Household Employers, later. Free h&r block software Payments to Relatives or Dependents You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. Free h&r block software However, do not count any amounts you pay to: A dependent for whom you (or your spouse if filing jointly) can claim an exemption, Your child who was under age 19 at the end of the year, even if he or she is not your dependent, A person who was your spouse any time during the year, or The parent of your qualifying person if your qualifying person is your child and under age 13. Free h&r block software Joint Return Test Generally, married couples must file a joint return to take the credit. Free h&r block software However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. Free h&r block software Legally separated. Free h&r block software   You are not considered married if you are legally separated from your spouse under a decree of divorce or separate maintenance. Free h&r block software You may be eligible to take the credit on your return using head of household filing status. Free h&r block software Married and living apart. Free h&r block software   You are not considered married and are eligible to take the credit if all the following apply. Free h&r block software You file a return apart from your spouse. Free h&r block software Your home is the home of a qualifying person for more than half the year. Free h&r block software You pay more than half the cost of keeping up your home for the year. Free h&r block software Your spouse does not live in your home for the last 6 months of the year. Free h&r block software Costs of keeping up a home. Free h&r block software   The costs of keeping up a home normally include property taxes, mortgage interest, rent, utility charges, home repairs, insurance on the home, and food eaten at home. Free h&r block software   The costs of keeping up a home do not include payments for clothing, education, medical treatment, vacations, life insurance, transportation, or mortgage principal. Free h&r block software   They also do not include the purchase, permanent improvement, or replacement of property. Free h&r block software For example, you cannot include the cost of replacing a water heater. Free h&r block software However, you can include the cost of repairing a water heater. Free h&r block software Death of spouse. Free h&r block software   If your spouse died during the year and you do not remarry before the end of the year, you generally must file a joint return to take the credit. Free h&r block software If you do remarry before the end of the year, the credit can be claimed on your deceased spouse's own return. Free h&r block software Provider Identification Test You must identify all persons or organizations that provide care for your child or dependent. Free h&r block software Use Form 2441, Part I, to show the information. Free h&r block software If you do not have any care providers and you are filing Form 2441 only to report taxable income in Part III, enter “none” in line 1, column (a). Free h&r block software Information needed. Free h&r block software   To identify the care provider, you must give the provider's: Name, Address, and Taxpayer identification number. Free h&r block software    If the care provider is an individual, the taxpayer identification number is his or her social security number or individual taxpayer identification number. Free h&r block software If the care provider is an organization, then it is the employer identification number (EIN). Free h&r block software   You do not have to show the taxpayer identification number if the care provider is a tax-exempt organization (such as a church or school). Free h&r block software In this case, enter “Tax-Exempt” in the space where Form 2441 asks for the number. Free h&r block software   If you cannot provide all of the information or the information is incorrect, you must be able to show that you used due diligence (discussed later) in trying to furnish the necessary information. Free h&r block software Getting the information. Free h&r block software    You can use Form W-10, Dependent Care Provider's Identification and Certification, to request the required information from the care provider. Free h&r block software If you do not use Form W-10, you can get the information from one of the other sources listed in the instructions for Form W-10, including: A copy of the provider's social security card, A copy of the provider's completed Form W-4, Employee's Withholding Allowance Certificate, if he or she is your household employee, A copy of the statement furnished by your employer if the provider is your employer's dependent care plan, or A letter or invoice from the provider if it shows the necessary information. Free h&r block software    You should keep this information with your tax records. Free h&r block software Do not send Form W-10 (or other document containing this information) to the Internal Revenue Service. Free h&r block software Due diligence. Free h&r block software   If the care provider information you give is incorrect or incomplete, your credit may not be allowed. Free h&r block software However, if you can show that you used due diligence in trying to supply the information, you can still claim the credit. Free h&r block software   You can show due diligence by getting and keeping the provider's completed Form W-10 or one of the other sources of information just listed. Free h&r block software Care providers can be penalized if they do not provide this information to you or if they provide incorrect information. Free h&r block software Provider refusal. Free h&r block software    If the provider refuses to give you the identifying information, you should report on Form 2441 whatever information you have (such as the name and address). Free h&r block software Enter “See Attached Statement” in the columns calling for the information you do not have. Free h&r block software Then attach a statement explaining that you requested the information from the care provider, but the provider did not give you the information. Free h&r block software Be sure to write your name and social security number on this statement. Free h&r block software The statement will show that you used due diligence in trying to furnish the necessary information. Free h&r block software U. Free h&r block software S. Free h&r block software citizens and resident aliens living abroad. Free h&r block software   If you are living abroad, your care provider may not have, and may not be required to get, a U. Free h&r block software S. Free h&r block software taxpayer identification number (for example, an SSN or an EIN). Free h&r block software If so, enter “LAFCP” (Living Abroad Foreign Care Provider) in the space for the care provider's taxpayer identification number. Free h&r block software How To Figure the Credit Your credit is a percentage of your work-related expenses. Free h&r block software Your expenses are subject to the earned income limit and the dollar limit. Free h&r block software The percentage is based on your adjusted gross income. Free h&r block software Figuring Total Work-Related Expenses To figure the credit for 2013 work-related expenses, count only those you paid by December 31, 2013. Free h&r block software Expenses prepaid in an earlier year. Free h&r block software   If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Free h&r block software Claim the expenses for the later year as if they were actually paid in that later year. Free h&r block software Expenses not paid until the following year. Free h&r block software   Do not count 2012 expenses that you paid in 2013 as work-related expenses for 2013. Free h&r block software You may be able to claim an additional credit for them on your 2013 return, but you must figure it separately. Free h&r block software See Payments for prior year's expenses under Amount of Credit, later. Free h&r block software If you had expenses in 2013 that you did not pay until 2014, you cannot count them when figuring your 2013 credit. Free h&r block software You may be able to claim a credit for them on your 2014 return. Free h&r block software Expenses reimbursed. Free h&r block software   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. Free h&r block software Example. Free h&r block software You paid work-related expenses of $3,000. Free h&r block software You are reimbursed $2,000 by a state social services agency. Free h&r block software You can use only $1,000 to figure your credit. Free h&r block software Medical expenses. Free h&r block software   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. Free h&r block software You can use them either way, but you cannot use the same expenses to claim both a credit and a medical expense deduction. Free h&r block software   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. Free h&r block software However, if you use your total expenses to figure your medical expense deduction, you cannot use any part of them to figure your credit. Free h&r block software For information on medical expenses, see Publication 502, Medical and Dental Expenses. Free h&r block software    Amounts excluded from your income under your employer's dependent care benefits plan cannot be used to claim a medical expense deduction. Free h&r block software Dependent Care Benefits If you receive dependent care benefits, your dollar limit for purposes of the credit may be reduced. Free h&r block software See Reduced Dollar Limit, later. Free h&r block software But, even if you cannot take the credit, you may be able to take an exclusion or deduction for the dependent care benefits. Free h&r block software Dependent care benefits. Free h&r block software    Dependent care benefits include: Amounts your employer paid directly to either you or your care provider for the care of your qualifying person while you work, The fair market value of care in a daycare facility provided or sponsored by your employer, and Pre-tax contributions you made under a dependent care flexible spending arrangement. Free h&r block software Your salary may have been reduced to pay for these benefits. Free h&r block software If you received benefits as an employee, they should be shown in box 10 of your Form W-2, Wage and Tax Statement. Free h&r block software See Statement for employee, later. Free h&r block software Benefits you received as a partner should be shown in box 13 of your Schedule K-1 (Form 1065) with code O. Free h&r block software   Enter the amount of these benefits on Form 2441, Part III, line 12. Free h&r block software Exclusion or deduction. Free h&r block software   If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Free h&r block software Your employer can tell you whether your benefit plan qualifies. Free h&r block software To claim the exclusion, you must complete Part III of Form 2441. Free h&r block software You cannot use Form 1040EZ. Free h&r block software   If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Free h&r block software Therefore, you would not get an exclusion from wages. Free h&r block software Instead, you would get a deduction on Form 1040, Schedule C, line 14; Schedule E, line 19 or 28; or Schedule F, line 15. Free h&r block software To claim the deduction, you must use Form 2441. Free h&r block software   The amount you can exclude or deduct is limited to the smallest of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Free h&r block software   The definition of earned income for the exclusion or deduction is the same as the definition used when figuring the credit except that earned income for the exclusion or deduction does not include any dependent care benefits you receive. Free h&r block software    You can choose to include your nontaxable combat pay in earned income when figuring your exclusion or deduction, even if you choose not to include it in earned income for the earned income credit or the credit for child and dependent care expenses. Free h&r block software Statement for employee. Free h&r block software   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. Free h&r block software Your employer will also include any dependent care benefits over $5,000 in your wages shown on your Form W-2 in box 1. Free h&r block software Effect of exclusion on credit. Free h&r block software   If you exclude dependent care benefits from your income, the amount of the excluded benefits: Is not included in your work-related expenses, and Reduces the dollar limit, discussed later. Free h&r block software Earned Income Limit The amount of work-related expenses you use to figure your credit cannot be more than: Your earned income for the year, if you are single at the end of the year, or The smaller of your or your spouse's earned income for the year if you are married at the end of the year. Free h&r block software Earned income for the purpose of figuring the credit is defined under Earned Income Test, earlier. Free h&r block software 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. Free h&r block software Example. Free h&r block software You remarried on December 3. Free h&r block software Your earned income for the year was $18,000. Free h&r block software Your new spouse's earned income for the year was $2,000. Free h&r block software You paid work-related expenses of $3,000 for the care of your 5-year-old child and qualified to claim the credit. Free h&r block software 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). Free h&r block software Separated spouse. Free h&r block software   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. Free h&r block software Use only your income in figuring the earned income limit. Free h&r block software Surviving spouse. Free h&r block software   If your spouse died during the year and you file a joint return as a surviving spouse, you may, but are not required to, take into account the earned income of your spouse who died during the year. Free h&r block software Community property laws. Free h&r block software   Disregard community property laws when you figure earned income for this credit. Free h&r block software Self-employment earnings. Free h&r block software   If you are self-employed, include your net earnings in earned income. Free h&r block software For purposes of the child and dependent care credit, net earnings from self-employment generally means the amount from Schedule SE (either Section A or Section B), line 3, minus any deduction for self-employment tax on Form 1040 or Form 1040NR, line 27. Free h&r block software Include your self-employment earnings in earned income, even if they are less than $400 and you did not file Schedule SE. Free h&r block software Clergy or church employee. Free h&r block software   If you are a member of the clergy or a church employee, see the Instructions for Form 2441 for details. Free h&r block software Statutory employee. Free h&r block software   If you filed Schedule C (Form 1040) or C-EZ (Form 1040) to report income as a statutory employee, also include as earned income the amount from line 1 of that Schedule C (Form 1040) or C-EZ (Form 1040). Free h&r block software Net loss. Free h&r block software   You must reduce your earned income by any net loss from self-employment. Free h&r block software Optional method if earnings are low or a net loss. Free h&r block software   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. Free h&r block software Get Publication 334, Tax Guide for Small Business, for details. Free h&r block software 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. Free h&r block software In this case, subtract any deduction you claimed on Form 1040 or Form 1040NR, line 27, from the total of the amounts on Schedule SE, Section B, lines 3 and 4b, to figure your net earnings. Free h&r block software You or your spouse is a student or not able to care for self. Free h&r block software   Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. Free h&r block software His or her earned income for each month is considered to be at least $250 if there is one qualifying person in your home, or at least $500 if there are two or more. Free h&r block software Spouse works. Free h&r block software   If your spouse works during that month, use the higher of $250 (or $500) or his or her actual earned income for that month. Free h&r block software Spouse qualifies for part of month. Free h&r block software   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 $250 (or $500) still applies for that month. Free h&r block software You are a student or not able to care for self. Free h&r block software   These rules also apply if you are a student or not able to care for yourself and are filing a joint return. Free h&r block software For each month or part of a month you are a student or not able to care for yourself, your earned income is considered to be at least $250 (or $500). Free h&r block software If you also work during that month, use the higher of $250 (or $500) or your actual earned income for that month. Free h&r block software Both spouses qualify. Free h&r block software   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 $250 (or $500) for that month. Free h&r block software Example. Free h&r block software Jim works and keeps up a home for himself and his wife Sharon. Free h&r block software Because of an accident, Sharon is not able to care for herself for 11 months during the tax year. Free h&r block software During the 11 months, Jim pays $3,300 of work-related expenses for Sharon's care. Free h&r block software These expenses also qualify as medical expenses. Free h&r block software Their adjusted gross income is $29,000 and the entire amount is Jim's earned income. Free h&r block software Jim and Sharon's earned income limit is the smallest of the following amounts. Free h&r block software   Jim and Sharon's Earned Income Limit   1) Work-related expenses Jim paid $   3,300   2) Jim's earned income $   29,000   3) Income considered earned by Sharon (11 × $250) $    2,750   Jim and Sharon can use $2,750 to figure the credit and treat the balance of $550 ($3,300 − $2,750) as a medical expense. Free h&r block software However, if they use the $3,300 first as a medical expense, they cannot use any part of that amount to figure the credit. Free h&r block software Dollar Limit There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. Free h&r block software This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons. Free h&r block software If you paid work-related expenses for the care of two or more qualifying persons, the applicable dollar limit is $6,000. Free h&r block software This limit does not need to be divided equally among them. Free h&r block software For example, if your work-related expenses for the care of one qualifying person are $3,200 and your work-related expenses for another qualifying person are $2,800, you can use the total, $6,000, when figuring the credit. Free h&r block software Yearly limit. Free h&r block software   The dollar limit is a yearly limit. Free h&r block software The amount of the dollar limit remains the same no matter how long, during the year, you have a qualifying person in your household. Free h&r block software Use the $3,000 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Free h&r block software Use $6,000 if you paid work-related expenses for the care of more than one qualifying person at any time during the year. Free h&r block software Example 1. Free h&r block software You pay $500 a month for after-school care for your son. Free h&r block software He turned 13 on May 1 and is no longer a qualifying person. Free h&r block software You can use the $2,000 of expenses for his care January through April to figure your credit because it is not more than the $3,000 yearly limit. Free h&r block software Example 2. Free h&r block software 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 childcare. Free h&r block software You paid $300 per month for the childcare. Free h&r block software You can use the full $1,800 you paid ($300 × 6 months) as qualified expenses because it is not more than the $3,000 yearly limit. Free h&r block software Reduced Dollar Limit If you received dependent care benefits that you exclude or deduct from your income, you must subtract that amount from the dollar limit that applies to you. Free h&r block software Your reduced dollar limit is figured on Form 2441, Part III. Free h&r block software See Dependent Care Benefits, earlier, for information on excluding or deducting these benefits. Free h&r block software Example 1. Free h&r block software George is a widower with one child and earns $24,000 a year. Free h&r block software He pays work-related expenses of $2,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. Free h&r block software His employer pays an additional $1,000 under a qualified dependent care benefit plan. Free h&r block software This $1,000 is excluded from George's income. Free h&r block software Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. Free h&r block software This is because his dollar limit is reduced as shown next. Free h&r block software   George's Reduced Dollar Limit 1) Maximum allowable expenses for one qualifying person $3,000 2) Minus: Dependent care benefits George excludes from income −1,000 3) Reduced dollar limit on expenses George can use for the credit $2,000 Example 2. Free h&r block software Randall is married and both he and his wife are employed. Free h&r block software Each has earned income in excess of $6,000. Free h&r block software They have two children, Anne and Andy, ages 2 and 4, who attend a daycare facility licensed and regulated by the state. Free h&r block software Randall's work-related expenses are $6,000 for the year. Free h&r block software Randall's employer has a dependent care assistance program as part of its cafeteria plan, which allows employees to make pre-tax contributions to a dependent care flexible spending arrangement. Free h&r block software Randall has elected to take the maximum $5,000 exclusion from his salary to cover dependent care expenses through this program. Free h&r block software Although the dollar limit for his work-related expenses is $6,000 (two or more qualifying persons), Randall figures his credit on only $1,000 of the $6,000 work-related expense paid. Free h&r block software This is because his dollar limit is reduced as shown next. Free h&r block software   Randall's Reduced Dollar Limit 1) Maximum allowable expenses for two qualifying persons $6,000 2) Minus: Dependent care benefits selected from employer's cafeteria plan and  excluded from Randall's income −5,000 3) Reduced dollar limit on work-related expenses Randall can use for the credit $1,000 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. Free h&r block software This percentage depends on your adjusted gross income shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Free h&r block software The following table shows the percentage to use based on adjusted gross income. Free h&r block software   IF your adjusted gross income is: THEN the       Over:       But not over:   percentage is:       $0   —   $15,000   35%       15,000   —   17,000   34%       17,000   —   19,000   33%       19,000   —   21,000   32%       21,000   —   23,000   31%       23,000   —   25,000   30%       25,000   —   27,000   29%       27,000   —   29,000   28%       29,000   —   31,000   27%       31,000   —   33,000   26%       33,000   —   35,000   25%       35,000   —   37,000   24%       37,000   —   39,000   23%       39,000   —   41,000   22%       41,000   —   43,000   21%       43,000   —   No limit   20%   To qualify for the credit, you must have one or more qualifying persons. Free h&r block software You should show the expenses for each person on Form 2441, line 2, column (c). Free h&r block software However, it is possible a qualifying person could have no expenses and a second qualifying person could have expenses exceeding $3,000. Free h&r block software You should list -0- for the one person and the actual amount for the second person. Free h&r block software The $6,000 limit that applies to two or more qualifying persons would still be used to compute your credit unless you already excluded or deducted, in Part III of Form 2441, certain dependent care benefits paid to you (or on your behalf) by your employer. Free h&r block software Example. Free h&r block software Roger and Megan Paris have two qualifying children. Free h&r block software They received $1,000 of dependent care benefits from Megan's employer during 2013, but they incurred a total of $19,500 of child and dependent care expenses. Free h&r block software They complete Part III of Form 2441 to exclude the $1,000 from their taxable income (offsetting $1,000 of their expenses). Free h&r block software Roger and Megan continue to line 27 to figure their credit using the remaining $18,500 of expenses. Free h&r block software Line 30 tells them to complete line 2 without including any dependent care benefits. Free h&r block software They complete line 2 of Form 2441, listing both Susan and James, as shown in the Line 2 example above. Free h&r block software Line 2 Example (a) Qualifying person's name (b) Qualifying person's social security number (c) Qualified expenses you incurred and paid in 2013 for the person listed in column (a) First Last Susan Paris 123-00-6789 -0- James Paris 987-00-4321 18,500. Free h&r block software 00 All of Susan's expenses were covered by the $1,000 of employer-provided dependent care benefits. Free h&r block software However, their son James has special needs and they paid $18,500 for his care. Free h&r block software Line 3 imposes a $5,000 limit for two or more children ($6,000 limit, minus $1,000 already excluded from income = $5,000) and Roger and Megan continue to complete the form. Free h&r block software Even though line 2 indicates one of the Paris children did not have any dependent care expenses, it does not change the fact that they had two qualifying children for the purposes of Form 2441. Free h&r block software Payments for prior year's expenses. Free h&r block software   If you had work-related expenses in 2012 that you paid in 2013, you may be able to increase the credit on your 2013 return. Free h&r block software Attach a statement to your form showing how you figured the additional amount from 2012. Free h&r block software Then enter “CPYE” (Credit for Prior Year Expenses) and the amount of the credit on the dotted line next to line 9 on Form 2441. Free h&r block software Also enter the name and taxpayer identification number of the person for whom you paid the prior year's expenses. Free h&r block software Then add this credit to the amount on line 9, and replace the amount on line 9 with the total. Free h&r block software See Worksheet A. Free h&r block software Example. Free h&r block software In 2012, Sam and Kate had childcare expenses of $2,600 for their 12-year-old child. Free h&r block software Of the $2,600, they paid $2,000 in 2012 and $600 in 2013. Free h&r block software Their adjusted gross income for 2012 was $30,000. Free h&r block software Sam's earned income of $14,000 was less than Kate's earned income. Free h&r block software A credit for their 2012 expenses paid in 2013 is not allowed in 2012. Free h&r block software It is allowed for the 2013 tax year, but they must use their adjusted gross income for 2012 to compute the amount. Free h&r block software The filled-in Worksheet A they used to figure this credit is shown later. Free h&r block software Sam and Kate add the $162 from line 13 of this worksheet to their 2013 credit and enter the total on their Form 2441, line 9. Free h&r block software They enter “CPYE $162” and their child's name and SSN in the space to the left of line 9. Free h&r block software Worksheet A. Free h&r block software Worksheet for 2012 Expenses Paid in 2013 Use this worksheet to figure the credit you may claim for 2012 expenses paid in 2013. Free h&r block software 1. Free h&r block software   Enter your 2012 qualified expenses paid in 2012 1. Free h&r block software     2. Free h&r block software   Enter your 2012 qualified expenses paid in 2013 2. Free h&r block software     3. Free h&r block software   Add the amounts on lines 1 and 2 3. Free h&r block software     4. Free h&r block software   Enter $3,000 if care was for one qualifying person ($6,000 if for two or more) 4. Free h&r block software     5. Free h&r block software   Enter any dependent care benefits received for 2012 and excluded from your income (from your 2012 Form 2441, line 25) 5. Free h&r block software     6. Free h&r block software   Subtract the amount on line 5 from the amount on line 4 and enter the result 6. Free h&r block software     7. Free h&r block software   Compare your earned income for 2012 and your spouse's earned income for 2012 and enter the smaller amount 7. Free h&r block software     8. Free h&r block software   Compare the amounts on lines 3, 6, and 7 and enter the smallest amount 8. Free h&r block software     9. Free h&r block software   Enter the amount on which you figured the credit for 2012 (from your 2012 Form 2441, line 6) 9. Free h&r block software     10. Free h&r block software   Subtract the amount on line 9 from the amount on line 8 and enter the result. Free h&r block software If zero or less, stop here. Free h&r block software You cannot increase your 2013 credit by any previous year's expenses 10. Free h&r block software     11. Free h&r block software   Enter your 2012 adjusted gross income (from your 2012 Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37) 11. Free h&r block software     12. Free h&r block software   Find your 2012 adjusted gross income in the table below and enter the corresponding decimal amount here 12. Free h&r block software             IF your 2012 adjusted gross income is:   THEN the decimal                 Over:   But not over:     amount is:                 $0 — $15,000     . Free h&r block software 35                 15,000 — 17,000     . Free h&r block software 34                 17,000 — 19,000     . Free h&r block software 33                 19,000 — 21,000     . Free h&r block software 32                 21,000 — 23,000     . Free h&r block software 31                 23,000 — 25,000     . Free h&r block software 30                 25,000 — 27,000     . Free h&r block software 29                 27,000 — 29,000     . Free h&r block software 28                 29,000 — 31,000     . Free h&r block software 27                 31,000 — 33,000     . Free h&r block software 26                 33,000 — 35,000     . Free h&r block software 25                 35,000 — 37,000     . Free h&r block software 24                 37,000 — 39,000     . Free h&r block software 23                 39,000 — 41,000     . Free h&r block software 22                 41,000 — 43,000     . Free h&r block software 21                 43,000 — No limit     . Free h&r block software 20           13. Free h&r block software   Multiply line 10 by line 12. Free h&r block software Add this amount to your 2013 credit and enter the total on your 2013 Form 2441, line 9. Free h&r block software Enter the following on the dotted line next to line 9 of Form 2441: “CPYE” The amount of this credit for a prior year's expenses           Also, attach a statement to your tax return showing the name and taxpayer identification number of the person for whom you paid the prior year's expenses and how you figured the credit 13. Free h&r block software       Worksheet A. Free h&r block software Filled-in Worksheet for 2012 Expenses Paid in 2013 Use this worksheet to figure the credit you may claim for 2012 expenses paid in 2013. Free h&r block software 1. Free h&r block software   Enter your 2012 qualified expenses paid in 2012 1. Free h&r block software   $2,000 2. Free h&r block software   Enter your 2012 qualified expenses paid in 2013 2. Free h&r block software   600 3. Free h&r block software   Add the amounts on lines 1 and 2 3. Free h&r block software   2,600 4. Free h&r block software   Enter $3,000 if care was for one qualifying person ($6,000 if for two or more) 4. Free h&r block software   3,000 5. Free h&r block software   Enter any dependent care benefits received for 2012 and excluded from your income (from your 2012 Form 2441, line 25) 5. Free h&r block software   0 6. Free h&r block software   Subtract the amount on line 5 from the amount on line 4 and enter the result 6. Free h&r block software   3,000 7. Free h&r block software   Compare your earned income for 2012 and your spouse's earned income for 2012 and enter the smaller amount 7. Free h&r block software   14,000 8. Free h&r block software   Compare the amounts on lines 3, 6, and 7 and enter the smallest amount 8. Free h&r block software   2,600 9. Free h&r block software   Enter the amount on which you figured the credit for 2012 (from your 2012 Form 2441, line 6) 9. Free h&r block software   2,000 10. Free h&r block software   Subtract the amount on line 9 from the amount on line 8 and enter the result. Free h&r block software If zero or less, stop here. Free h&r block software You cannot increase your 2013 credit by any previous year's expenses 10. Free h&r block software   600 11. Free h&r block software   Enter your 2012 adjusted gross income (from your 2012 Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37) 11. Free h&r block software   30,000 12. Free h&r block software   Find your 2012 adjusted gross income in the table below and enter the corresponding decimal amount here 12. Free h&r block software   . Free h&r block software 27         IF your 2012 adjusted gross income is:   THEN the decimal                 Over   But not over     amount is:                 $0 — $15,000     . Free h&r block software 35                 15,000 — 17,000     . Free h&r block software 34                 17,000 — 19,000     . Free h&r block software 33                 19,000 — 21,000     . Free h&r block software 32                 21,000 — 23,000     . Free h&r block software 31                 23,000 — 25,000     . Free h&r block software 30                 25,000 — 27,000     . Free h&r block software 29                 27,000 — 29,000     . Free h&r block software 28                 29,000 — 31,000     . Free h&r block software 27                 31,000 — 33,000     . Free h&r block software 26                 33,000 — 35,000     . Free h&r block software 25                 35,000 — 37,000     . Free h&r block software 24                 37,000 — 39,000     . Free h&r block software 23                 39,000 — 41,000     . Free h&r block software 22                 41,000 — 43,000     . Free h&r block software 21                 43,000 — No limit     . Free h&r block software 20           13. Free h&r block software   Multiply line 10 by line 12. Free h&r block software Add this amount to your 2013 credit and enter the total on your 2013 Form 2441, line 9. Free h&r block software Enter the following on the dotted line next to line 9 of Form 2441: “CPYE” The amount of this credit for a prior year's expenses             Also, attach a statement to your tax return showing the name and taxpayer identification number of the person for whom you paid the prior year's expenses and how you figured the credit 13. Free h&r block software   $162   How To Claim the Credit To claim the credit, you can file Form 1040, Form 1040A, or Form 1040NR. Free h&r block software You cannot claim the credit on Form 1040EZ or Form 1040NR-EZ. Free h&r block software Form 1040, Form 1040A, or Form 1040NR. Free h&r block software    You must complete Form 2441 and attach it to your Form 1040, Form 1040A, or Form 1040NR. Free h&r block software Enter the credit on your Form 1040, line 48; Form 1040A, line 29; or Form 1040NR, line 46. Free h&r block software Limit on credit. Free h&r block software    The amount of credit you can claim is limited to your tax. Free h&r block software For more information, see the Instructions for Form 2441. Free h&r block software Tax credit not refundable. Free h&r block software   You cannot get a refund for any part of the credit that is more than this limit. Free h&r block software Recordkeeping. Free h&r block software You should keep records of your work-related expenses. Free h&r block software Also, if your dependent or spouse is not able to care for himself or herself, your records should show both the nature and length of the disability. Free h&r block software Other records you should keep to support your claim for the credit are described under Provider Identification Test, earlier. Free h&r block software Employment Taxes for Household Employers If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. Free h&r block software If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. Free h&r block software If the individuals who work in your home are self-employed, you are not liable for any of the taxes discussed in this section. Free h&r block software Self-employed persons who are in business for themselves are not household employees. Free h&r block software Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. Free h&r block software If you use a placement agency that exercises control over what work is done and how it will be done by a babysitter or companion who works in your home, the worker is not your employee. Free h&r block software This control could include providing rules of conduct and appearance and requiring regular reports. Free h&r block software In this case, you do not have to pay employment taxes. Free h&r block software But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee. Free h&r block software If you have a household employee, you may be subject to: Social security and Medicare taxes, Federal unemployment tax, and Federal income tax withholding. 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