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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. $1,200
  2. $2,100
  3. $3,000
  4. $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).”