Paul and Karen Kent are married, and both are employed. Paul earns 44,000,andKarenearns 9,000 during 2021. They have two dependent children, both under the age of 13, named Samuel and Joy. In order to work, Paul and Karen pay 3,800(1,900 for each child) to Sunnyside Day Care Center (422 Sycamore Road, Fort Worth, TX 76028; Employer Identification Number: 11-2345678) for childcare while they are working. Assuming that Paul and Karen file a joint return, what is their tax credit for child and dependent care expenses?
Samuel and Annamania are married, file a joint return, and have three qualifying children. In 2021, they earn wages of $34,000 and have no other income. Calculate the earned income credit for Samuel and Annamania. Round your intermediate computations to two decimal places and your final answer to the nearest dollar.
The Correct Answer and Explanation is:
To calculate the tax credit for child and dependent care expenses for Paul and Karen Kent, as well as the earned income credit for Samuel and Annamania, we will follow the IRS guidelines for both credits for the tax year 2021.
1. Child and Dependent Care Credit for Paul and Karen Kent:
Paul and Karen paid $3,800 for child care for their two dependent children while they worked. For 2021, the child and dependent care tax credit allows a percentage of qualifying child care expenses, depending on their adjusted gross income (AGI).
The calculation is as follows:
- Qualifying expenses: The maximum amount of qualifying child care expenses is capped at $3,000 for one child and $6,000 for two or more children. Since Paul and Karen have two children, they can use the maximum of $6,000 for their calculation.
- AGI: Paul and Karen’s combined income is $44,000 (Paul) + $9,000 (Karen) = $53,000. Based on IRS guidelines, for an AGI of $53,000, the applicable percentage of the credit is 20%.
- Credit Calculation:
[
\text{Credit} = \text{Qualifying Expenses} \times \text{Credit Percentage}
]
[
\text{Credit} = \$6,000 \times 20\% = \$1,200
]
Thus, Paul and Karen Kent’s tax credit for child and dependent care expenses is $1,200.
2. Earned Income Credit for Samuel and Annamania:
The Earned Income Credit (EIC) is designed to benefit low- to moderate-income working individuals and families, particularly those with children. The calculation of EIC depends on their earned income and the number of qualifying children.
- Qualifying Children: Samuel and Annamania have three qualifying children.
- Income: Their earned income is $34,000.
According to IRS guidelines for 2021, the maximum EIC for a taxpayer with three or more qualifying children is $6,728, and the credit is gradually phased out for incomes above certain thresholds. The phase-out begins at $26,500 for joint filers and is fully phased out at $57,414.
- Phase-Out Calculation:
[
\text{Phase-out amount} = \text{AGI} – \text{Threshold} = \$34,000 – \$26,500 = \$7,500
]
The phase-out rate is 21.06% (for 2021). Therefore, the reduction in the EIC is:
[
\text{Reduction} = \$7,500 \times 21.06\% = \$1,580.50
]
The maximum EIC for three children is $6,728, so their EIC after the reduction will be:
[
\text{EIC} = \$6,728 – \$1,580.50 = \$5,147.50 \approx \$5,148
]
Thus, the earned income credit for Samuel and Annamania is $5,148.
Summary:
- Paul and Karen Kent’s Child and Dependent Care Credit: $1,200
- Samuel and Annamania’s Earned Income Credit: $5,148