Kaelyn's mother, Judy, looks after Kaelyn's four-year-old twins so Kaelyn can go to work (she drops off and picks up the twins from Judy's home every day). Since Judy is a relative, Kaelyn made sure, for tax purposes, to pay her mother the going rate for child care ($6,300 for the year). What is the amount of Kaelyn's child and dependent carecredit if her AGI for the year was $36,000? (Exhibit 8-9 in the text)

Question

Quizplus · Accepted Answer

The maximum amount of eligible expenses for the child and dependent care credit is $3,000 for one child or dependent and $6,000 for two or more children or dependents. Kaelyn paid $6,300 for child care expenses, which exceeds the maximum amount for two or more children. Therefore, the eligible expenses for the credit will only be $6,000. The credit is calculated based on AGI, and the percentage ranges from 20% to 35% depending on AGI. For Kaelyn's AGI of $36,000, the credit percentage is 20%. 
Child and dependent care credit = eligible expenses x credit percentage 
Child and dependent care credit = $6,000 x 0.20 
Child and dependent care credit = $1,200 (maximum) 
Since the child and dependent care credit can only reduce tax liability, and not create a refund, Kaelyn's credit is limited to her tax liability. It is possible that her tax liability is less than $1,200, in which case the credit will be reduced to the amount of her tax liability. Thus, the correct answer is B.

Kaelyn's Mother, Judy, Looks After Kaelyn's Four-Year-Old Twins So Kaelyn