Robert and Mary file a joint tax return for 2018 with adjusted gross income of $34,000.Robert and Mary earned income of $20,000 and $14,000, respectively, during 2018.In order for Mary to be gainfully employed, they pay the following child care expenses for their 4-year-old son, John: $\begin{array}{llcc}
\text {Union Day Care Center } & \$1,700 \
\text { Wilma, baby sitter (Robert's mother) } &\$1,000\
\end{array}$
What is the amount of the child and dependent care credit they should report on their tax return for 2018?

Question

Robert and Mary file a joint tax return for 2018 with adjusted gross income of $34,000.Robert and Mary earned income of $20,000 and $14,000, respectively, during 2018.In order for Mary to be gainfully employed, they pay the following child care expenses for their 4-year-old son, John: $\begin{array}{llcc}
  \text {Union Day Care Center  } & \$1,700 \
 \text { Wilma, baby sitter (Robert's mother) } &\$1,000\
\end{array}$
 What is the amount of the child and dependent care credit they should report on their tax return for 2018?

Quizplus · Accepted Answer

First, we need to determine the maximum child and dependent care credit they can claim. This is calculated as 35% of the qualifying expenses up to $3,000 for one child ($6,000 for two or more children).

In this case, their total qualifying expenses for child care is $2,700 ($1,700 + $1,000). Since they only have one child, we can use the $3,000 limit.

35% of $2,700 is $945, but we need to check if that exceeds their tax liability.

To calculate their tax liability, we need to start with their taxable income. Since their adjusted gross income is $34,000, we need to subtract the standard deduction for a married couple filing jointly, which is $24,000 in 2018. This leaves $10,000 in taxable income.

Using the tax tables, we can determine that their tax liability is $952. However, the child and dependent care credit is non-refundable, so we can only use it to reduce their tax liability to zero.

Therefore, they can claim a child and dependent care credit of $675 ($952 tax liability minus $277 credit).