Polly and her husband, Leo, file a joint return and expect to report 2015 AGI of
ID: 2444651 • Letter: P
Question
Polly and her husband, Leo, file a joint return and expect to report 2015 AGI of $75,000. Polly's employer offers a child and a dependent care reimbursement plan that allows up to $5,000 of qualifying expenses to be reimbursed in exchange for a $5,000 reduction in the employee's salary. Because Polly and Leo have two minor children requiring child care that costs $5,800 each year, Polly is wondering if she should sign up for the program instead of taking advantage of the credit for child and dependent care expenses.
Polly and Leo are in the 25% tax bracket. Analyze the effect of the two alternatives. How would your answer differ if Polly and Leo's AGI was $25,000 instead of $75,000? Assume in that case that their marginal tax rate is 10%.
Explanation / Answer
Tax Liability when Income is $75000. Alternative 1. Dependent care Reimbursement. Joint AGI 75000 Less: Dependent care reimbursement 5000 Taxable income 70000 Tax liability @25% 17500 Alternative 1. credit for child and dependent care expenses. Joint AGI 75000 **Less: Dependent care reimbursement 5800 Taxable income 69200 Tax @25% 17300 **Maximum deduction can be taken for $6000 if filinf jointly. Tax Liability when Income is $25000. Alternative 1. Dependent care Reimbursement. Joint AGI 25000 Less: Dependent care reimbursement 5000 Taxable income 20000 Tax liability @10% 2000 Alternative 1. credit for child and dependent care expenses. Joint AGI 25000 **Less: Dependent care reimbursement 5800 Taxable income 19200 Tax @10% 1920 **Maximum deduction can be taken for $6000 if filinf jointly.