Question

Child and Dependent Care Credit (LO 6.3) Marty and Jean are married and have 4-year-old twins. Jean is going to school full-time for 10 months of the year, and Marty earns $52,900. The twins are in day care so Jean can go to school while Marty is at work. The cost of day care is $9,600. TABLE 6.1 CHILD AND DEPENDENT CARE CREDIT PERCENTAGES Adjusted Gross Income Applicable Percentage Over But Not Over $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%

What is their child and dependent care credit?

Answer 1

Deemed earned income of Jean = 500 * 10 = 5,000

Earned income of Marty = 52,900

Eligible expenses = 3,000 * 2 = 6,000

Lesser of above 3 amounts = 5,000

Applicable percentage at AGI of 52,900 is 20%

Amount of credit = 5,000 * 20% = 1,000

Notes:

Child and dependent care credit:

Taxpayer incur expenditure, to take care of their dependents, so they can work. Child and dependent care credit is an incentive to those having child and dependent care expenses. Well-being of the qualifying individual must be the primary purpose of the eligible expenditure.

Qualifying individual: Eligible expenditure incurred for the well-being of the qualifying individual are only allowed. Conditions determining qualifying individual are:

1. Qualifying individual being a dependent child under age 13.

2. Any other dependents including spouse being physically or mentally incapable of self-care. They must have lived with the taxpayer for more than half of tax year.

3. Qualifying individual has taxpayer identification number.

Conditions for allowing credit: Taxpayer must fulfil the following conditions for claiming credit.

1. Not filing as married filing separate.

2. Care provider must not be taxpayer’s spouse, under age 19 child of taxpayer, or a taxpayer’s dependent claimed in the return.

3. Qualifying individual being a child under age thirteen, care provider must not be their parent.

Amount of credit: Percentage of eligible expenses paid is the amount of credit. Adjusted gross income of the taxpayer determines the percentage applicable.

Eligible expenses: Eligible expenses are subject to a ceiling of $3,000 if the taxpayer has one qualifying individual and $6,000 if the taxpayer has two or more qualifying individuals. Tax-free dependent care benefits received reduces dollar limit applicable.

Special rule: Eligible expenses for married filing joint taxpayer’s are further limited to the lesser of either spouses earned income. Sometimes one of either spouses may be either disabled or fulltime student and earning no or little income. Then such spouse is deemed to have earned income of $250 per month for one qualifying individual and $500 per month for two or more qualifying individuals.

Earned income: Salaries and wages are part of earned income of taxpayer. Income reported on schedule SE of self-employed taxpayer is also earned income.