Question

Ivanna, who has three children under age 13, worked full-time while her husband, Sergio, was attending college for nine months during the year. Ivanna earned $40,275 and incurred $8,175 of child care expenses. Click here to access the percentage chart to us for this problem. The amount of Ivanna and Sergio's credit for child and dependent care expenses is $

Computing the Child and Dependent Care Credit

Adjusted Gross Income
Over			But Not Over			Applicable Rate of Credit
	$          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%

Answer 1

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.

Calculation:

Earned income of ivana is $40,275.

Deemed earned income of her husband = $500 * 9 = $4,500

Lesser of earned income of two is $4,500.

Amount of eligible expenses is thus limited to $4,500.

Amount of AGI of the couple is $40,275. Percentage applicable with this AGI is 22%.

Thus, the amount of credit is = $4,500 * 22% = $990