Tim and Martha paid $7,500 in qualified employment-related expenses for their th
ID: 2496775 • Letter: T
Question
Tim and Martha paid $7,500 in qualified employment-related expenses for their three young children below 13 years, who live with them in their household. Martha received $2,700 of dependent care assistance from her employer, which was properly excluded from gross income. The couple had $42,700 of AGI earned equally by Tim and Martha.
Use the appropriate tax tables or tax rate schedules.
Adjusted gross income Applicable income
$15,000 or less 35%
15,001 – 17,000 34
17,001 – 19,000 33
19,001 – 21,000 32
21,001 – 23,000 31
23,001 – 25,000 30
25,001 – 27,000 29
27,001 – 29,000 28
29,001 – 31,000 27
31,001 – 33,000 26
33,001 – 35,000 25
35,001 – 37,000 24
37,001 – 39,000 23
39,000 – 41,000 22
41,001 – 43,000 21
43,001 or more 20
a. What amount of child and dependent care tax credit can they claim on their Form 1040?
b.
How would your answer differ (if at all) if the couple had AGI of $36,400 that was earned entirely by Tim? (Do not leave cells blank, enter "0" if there is no effect.)
Explanation / Answer
Answer:a The maximum amount of qualifying expenses is limited to $6,000 for two or more children. But, the amount should be reduced by the $2700 that Martha received from her employer. So the total expenses are $3300. Because their AGI was $42700, Tim and Martha are entitled to a credit equal to 21% of their expenses, or $693. ($3300 x .21 = $693)
Answer:b If the couple had AGI of $36,400 earned only by Tim, the credit would be zero because there would be no child care expenses. Since Martha was not employed, no credit is allowed. Expenses which are allowed are limited to the smaller of the earned income of the taxpayer or the taxpayer’s spouse. Since Martha had zero income no credit is allowed.
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