Level 3

Question

Form 2441 with passive loss not calculating

Forum|Forum|8 days ago
June 27, 2026
5 replies
57 views

We have prepared a return for a client that taxpayer and spouse each have wages totaling over 100K. They paid child care for 2 children totaling $7950. They also have a passive loss from the sale of a rental property which results in negative AGI.

Lacerte did not generate the 2441, it got to Part II, Line 2 and quit. The 2441 reflects zero earned income. As per form instructions, taxpayers earned income should be on line 4 and spouse income should be on line 5. From there the credit is calculated and then disallowed as the negative AGI results in no tax liability to apply the credit to.

The lack of the properly calculated 2441 is creating an issue with their resident state return, Colorado, as Colorado allows the child care credit to on the state return IF the credit is calculated on form 2441 and disallowed due to the Credit Limit Worksheet.

I have confirmed that the passive loss is the culprit, as I removed the loss in a copy of the return and the 2441 calculated properly.

I’ve spoken with Lacerte - (twice as the first call was mysteriously disconnected) and both individuals I spoke with helpfully read me Lacerte's instructions for what constitutes “earned income” which only reflected income received from self-employment and self-employment income reflected on a K1 from a partnership. No mention of wages.

I helpfully read to them the instructions for form 2441, which states “The amount shown on Form 1040, 1040-SR, or 1040-NR, line 1z, minus any amount:”

The deductions are foreign income, SE tax , clergy income and housing allowances, which do not apply in this situation.

Has anyone encountered this situation and if so were you able to successfully prepare the 2441?

BobKamman

Level 15

On the 1040, if they have no taxable income, they don’t need the credit, right? Because it’s not refundable. Is the Colorado credit refundable? Do they still have taxable income for Colorado, even if not for federal?

J

jmsbacpaAuthor

Level 3

The Colorado credit is refundable, but requires a 2441 to be attached that reflects the calculated credit, limited by the credit limitation worksheet. The 2441 form that is currently being generated does not even reflect a credit.

BobKamman

Level 15

It’s an interesting question. It seems to me that for 2025 returns, the Colorado law says “you get up to 50% of the federal credit, and if that amount is more than your Colorado tax, you get a refund of the difference.” See the Department of Revenue explanation:

“For tax years 2025 and earlier, the Colorado credit is based on federal credit the taxpayer actually claimed and was allowed for the same tax year. For tax years 2026 and later, the Colorado credit is based on the full federal credit the taxpayer was eligible for, even if they could not claim the entire federal credit because they did not have sufficient federal tax liability.”

But I’m not in Colorado, so maybe there are recent developments or guidance that suggest a state credit is allowed for 2025 even if there is no federal credit.

J

jmsbacpaAuthor

Level 3

I understand the Colorado Rules, as I am in Colorado.

As you have so clearly indicated, the ability to claim the credit is tied to the federal credit. The disallowance of the credit by Colorado is tied to the fact that the 2441 is not even calculating the credit. Federal rules are clear on the credit, it is calculated and then limited or disallowed based on tax liability, not negative AGI.

The problem compounds in that the programmer who programmed Colorado was obviously not the programmer who programmed the 2441, because the Credit on the Colorado return tries to calculate from line 9a of the 2441 and with an incorrect zero on that line, the Colorado portion of the credit does not properly calculate.

Lacerte does helpfully provide a diagnostic, that cannot be fixed because they do not allow you to override the credit calculation.

BobKamman

Level 15

If for 2025 the Colorado credit is 50% of the federal credit, and the federal credit is zero, what does that make the Colorado credit?

J

jmsbacpaAuthor

Level 3

Zero.

On the 1040, if they have no taxable income, they don’t need the credit, right? Because it’s not refundable. Is the Colorado credit refundable? Do they still have taxable income for Colorado, even if not for federal?

It’s an interesting question. It seems to me that for 2025 returns, the Colorado law says “you get up to 50% of the federal credit, and if that amount is more than your Colorado tax, you get a refund of the difference.” See the Department of Revenue explanation:

But I’m not in Colorado, so maybe there are recent developments or guidance that suggest a state credit is allowed for 2025 even if there is no federal credit.

If for 2025 the Colorado credit is 50% of the federal credit, and the federal credit is zero, what does that make the Colorado credit?

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