Legislation would give credit against personal income tax equal to 50 percent of child-care expenses incurred by a taxpayer (subject to a limit of $750 credit per family).
Analyze the implications of credit on two families of this state: Family #1 (in the 18 percent federal tax bracket) and Family #2 (in the 35 percent federal tax bracket), each family expends approximately $1,500 per year for child-care. Currently only State income taxes are fully deductible for federal tax purposes.If the child-care allowance were ena
a. If the child-care allowance were enacted as a credit and the state tax rate was a flat 4.0 percent, how much would state liability for each of the families change?
b. Assuming the child-care allowance is enacted as a deduction (still subject to the same $750 limit), what is the net after-tax cost of child-care expenses to each of the families?
You should consider both changes in federal and state tax liability (Hint: subtract the changes in state and federal liability from $1,500).
c. From the above computations which approach (credit or deduction) do you suppose the Child-care coalition in the state would favor? Why? Is this the same approach that the state comptroller would favor? Why or why not?