Question

Barb and Barney are married and file a joint return. They have two children, Lulu and Zoe, that live at home and whom they fully support. Lulu is 9 and Zoe is 13 years old. In order for Barb and Barney to both work, they pay care providers to take care of Lulu and Zoe after school. The total care cost for the year were: Lulu $4,800, and Zoe $3,800. During the year Barb earned salary of $24,500 and Barney earned salary of $25,000 and they each made a deductible $5,000 contribution to a traditional spousal IRA. Neither Barb nor Barney are covered by qualified plans at work. Calculate the dollar amount of Barb and Barney’s tax credit for child and dependent care expenses. Show your work including all calculations.

Answer 1

-Calculation of  dollar amount of Barb and Berneys Tax Credit for child and dependent care expenses

-Qualifying Individual

A qualifying individual for the child and dependent care credit is:

• Your dependent qualifying child who is under age 13 when the care is provided,
• Your spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year, or
• An individual who is physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (a) is your dependent; or (b) could have been your dependent except that he or she has gross income that equals or exceeds the gross income test amount, or files a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer's 2018 return.

According to the definition ,Lulu and Zoe care provider expenses will qualify for Tax credit as Barb and Berney are married and filing return Jointly and meeting all the above mentioned rules.

Child and Dependent Care Credit Value

Upto 35% of qualifying expenses of $3,000 for one child or dependent, or. up to $6,000 for two or more children or dependents.

Barb Barney

Salary Income (P.a) $24,500 $ 25,000

Less -

Contribution to

Traditional Spouse IRA $5,000 $5,000

Adjusted Gross Income $19,500 $20,000

If we sum up Expenses,i.e $4800 +$3800 = $8600

Qualifying Income for tax credit -

Adjusted Gross income is $19,500 + $20,000 = $39,500
According to the rule,If your income is below $15,000, you will qualify for the full 35%. The percentage falls by 1% for every additional $2,000 of income until it reaches 20% (for an income of $43,000 or more).

As Income is above $15,000, percentage comes to 23% on 39,500.

= 39,500 *23% =9,085

Hence as per rule,Maximum benefit cap comes to 6,000 for both children though it is 9,085.