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)$1,560
B)$1,144
C)$1,200
D)$1,440
E)None of the above

Question

Quizplus · Accepted Answer

W is entitled to a dependency deduction for his two preschool children, which gives him a total of $4,000 in exemptions ($2,000 per child).
W paid employment-related expenses of $4,000 for household services within his home, which qualifies him for the Child and Dependent Care Credit. Since W's AGI is $25,000, he can take a credit equal to 35% of his qualifying expenses, which is $1,400 ($4,000 x 35%).
Additionally, W paid $1,200 in child care expenses at a nursery school, which can also be used to calculate the credit. The maximum credit allowed for child care expenses for two children is $2,100 ($1,050 per child). Since W's expenses were only $1,200, he will receive a credit for the full amount.
Therefore, W's total child care credit for the year is $1,400 + $1,200 = $2,600. However, the credit is limited to the amount of W's tax liability, which is $2,000. Therefore, W's child care credit for the year is $2,000, which is Option A).

W, a Widower, Maintains a Household for Himself and Two