Question

W, a widower, maintains a household for himself and two preschool children, for whom he is entitled to a dependency deduction. He has adjusted gross income of $25,000: $20,000 wages and $5,000 interest. W paid employment related expenses of $4,000 for household services within his home, and paid $1,200 child care expenses at a nursery school. His child care credit for the year is: a. $1,056. b. $1,144. c. $1,200. d. $1,440. e. $1,560.

Answer 1

As per IRC section 21, Taxpayers with an adjusted gross income of $15,000 or less use the highest applicable percentage of 35%. For taxpayers with an adjusted gross income over $15,000, the credit is reduced by one percentage point for each $2,000 of adjusted gross income (or fraction thereof) over $15,000. The minimum applicable percentage of 20% is used by taxpayers with adjusted gross incomes greater than $43,000. Therefore, the credit % comes out to :

35% - (25000-15000)*1/2000 = 35% - 5

= 30%

The adjusted gross income = $ 25000

Total expenses = employment related expenses + child care expenses

= 4000 + 1200

= $ 5200

child care credit for the year = 5200 * 30%

= $ 1560