14-50 Child and Dependent Care Credit. In each of the following independent situ

Question

14-50 Child and Dependent Care Credit. In each of the following independent situations, determine the amount of the child and dependent care tax credit. (Assume that both taxpayers are employed and the year is 2017).

Brad and Bonnie are married and file a joint return, with earned income of $40,000 and $14,000, respectively. Their combined AGI is $52,000. They have two children, ages 10 and 12, and employ a live-in nanny at an annual cost of $9,000.

Assume the same facts as in Part a, except that Brad and Bonnie employ Bonnie’s mother, who is not their dependent, as the live-in nanny.

Bruce is divorced and has two children, ages 10 and 16. He has AGI and earned income of $35,000. Bruce incurs qualifying child care expenses of $8,000 during the year, incurred equally for both children. Bruce’s employer maintains an employee dependent care assistance program. $1,000 was paid to Bruce from this program and excluded from Bruce’s gross income.

Buddy and Candice are married and file a joint return. Their combined AGI is $50,000. Buddy earns $46,000, and Candice’s salary from a part-time job is $4,000. They incur $5,000 of qualifying child care expenses for a day-care facility for their two children, ages 2 and 4.

Ben and Bunny are married and file a joint return. Their AGI is $75,000, all earned by Bunny. Ben was a full-time student for two semesters (10 months) at State University during the year. They incur $7,000 of qualifying child care expenses for their two children, ages 6 and 4.

Explanation / Answer

Answer :- Child and dependant tax care credit can be claimed by one or more qualifying individual to enable taxpayer to work or actively look for work. The amount of tax credit depends on the amount of work related expense paid to care provider for the care of a qualifying individual. The total expense that you may use calculate the credit credit may not be more than $3000 if more one qualifying individual or $6000 if for more than one or more qualifying indvidual.

Qualifying individual

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

1) Qualifying invidivual age should be 13 or less.

2)Spouse who is physically or mentally incapable of self care and lived with you for more than half of the year

a) Brad and bonnie joint income is $52,000. The credit can be worth from 20% to 35% of the expense you paid but depends on the AGI. If your AGI is below $15000 then you may claim 35% in full and for each additional $2000 increase there is a fall in 1% until it reaches 20%. So for Brad and Bonnie it is $ 6000*.20=$1,200 tax credit (As maximum expense that can be claimed is $6,000)

b) The dependent tax care credit cannot be claimed if the care is provided by the following person

i) The parent of the qualifying person

ii) Person you can claim as dependent

iii) The spouse or your child under age of 19 regardless of the fact that whether they are dependent.

So Brad and bonnie will not be able to claim the dependent tax care credit.

c) Assuming Bruce being the custodian parent then he can claim tax care credit for the qualifying child i.e who is under the age of 13. Since he is equally expensing on both the child so for $4,000 expense he will be able to claim the tax credit. Tax credit will be $2000*25%=$750. (25% is arrived as discussed earlier for each $2000 additional income above $15,000 the claim percentage reduce by 1% and maximum expense on which credit can be calculated is $3000 ($3000 is allowed per child as expense) reduced by $1,000 for the benefit provided by employer). Also, if the value of benefit provided by the employer is less than $ 5,000 then it is not a taxable income.

d) Buddy and candice can claim dependent tax credit and it does not matter if Candice is in a part time job. So the credit will be $5,000*20%=$1,000 (since there total AGI is $50,000)

e) Ben and Bunny can claim dependent tax credit for the qualifying expense for the two children. The requirement states that both should be married and living together and earned income exception is that either spouse is disabled or a full time student for atleast five months in a year. So credit will be $ 6000 (as maximum allowed is $3,000 per child) * 20%= $1,200

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