Mr. and Mrs. OP have two dependent children. They paid $7,200 wages to a houseke

Question

Mr. and Mrs. OP have two dependent children. They paid $7,200 wages to a housekeeper to care for the children and $550 employer payroll tax on her wages. Mr. and Mrs. OP file a joint return. In each of the following cases, compute their dependent care credit.

a) One child is age 10 and the other is age 15. Mr. OP’s earned income is $75,000 and Mrs. OP has no earned income. Their AGI is $81,300.

b) One child is age 2 and the other is age 6. Mr. Op’s earned income is $45,000 and Mrs. OP’s earned income is $28,000. Their AGI is $81,300.

Explanation / Answer

a. In the first case Mrs OP does not have any earned income, hence they will not be eligible for the tax credit.

b. Both Mr OP and Mrs OP have earned inccome, both the children are under the age 13, hence they are eligible for a maximum deduction of $6,000 (3,000 per dependant). The amount of credit depends on the income and it would be between 20-35% of the expense incurred. In their case, 7,200 is the allowable expense. The AGI is 81,300, hence the allowable amount is 20% of 7,200 = 1,440 is the tax credit allowed

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