Student Question of the Week: Income Tax
Student Question from: John C.
Course: Income Tax – Childcare Credit
Student Question:
I have a quick question about review exercise number 3 (below). It indicates that $2,100 would be the correct answer. I thought $6,000 was the maximum for two children? Are you perhaps asking for the minimum instead, or should we have assumed some kind of AGI Limitation? What am I missing?
3. Emily’s job requires that she put both of her children in daycare. The maximum amount she would be able to use as a childcare credit would be which of the following amounts?
- $1,200
- $2,100
- $3,000
- $6,000
Instructor Response:
Hey John! Yeah, this is a confusing credit. It’s the expenses that can’t exceed that $6,000 amount, not the actual credit. After the qualifying expense is determined, a percentage is applied to arrive at the credit. Here’s how our text explains it (I bolded and underlined the main sentence):
“The credit is a percentage, based on the taxpayer’s adjusted gross income and the amount of expenses incurred. It can range from 20 to 35 percent of qualifying expenses, which are not to exceed $3,000 for one qualifying child and $6,000 for two or more. The percentage applied to expenses declines as a taxpayer’s income increases. Currently, when a taxpayer’s adjusted gross income exceeds $43,000, a 20% rate is used to calculate the credit amount. Therefore, the maximum credit would total $1,200 at a 20% rate (.20 x $6,000) and $2,100 at a 35% rate (.35 x $6,000).”
