Expand the Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit (CDCTC) provides a credit of between 20 percent and 35 percent of up to $3,000 ($6,000 for two or more children) of childcare expenses for children under age 13 whose parents work or go to school. Families with income below $15,000 qualify for the 35 percent credit. That rate falls by 1 percentage point for each additional $2,000 of income (or part thereof) until it reaches 20 percent for families with income of $43,000 or more. The credit is non-refundable—that is, it can only reduce a family’s income tax liability to zero; any additional credit is lost.
Unless Congress extends EGTRRA beyond its scheduled expiration at the end of 2010, the CDCTC will revert to its previous maximum credit rate of 30 percent for families with income under $10,000. That rate would fall by 1 percentage point for each additional $2,000 of income until it reaches 20 percent for families with income of $28,000 or more. In addition, the maximum expenditures for which taxpayers can claim the credit will decrease from $3,000 ($6,000 for two or more children) to $2,400 ($4,800). The maximum credit would thus drop from $1,050 ($2,100 for two or more children) to $720 ($1,440).
President Obama proposes to make permanent both the maximum 35 percent credit rate and the $3,000 maximum for creditable expenses ($6,000 for two or more children). He would also permanently increase to $85,000 the income threshold above which the credit rate phases down. That rate would decrease by 1 percentage point for each $2,000 of income over that threshold until it hits a minimum of 20 percent for families with income over $113,000. For families with income between $28,000 and $85,000, the maximum credit would increase from $600 to $1,050 (from $1,200 to $2,100 for families with two or more children). Families with income between $10,000 and $28,000 or between $85,000 and $113,000 would see smaller increases in the maximum credit they could claim.1
The credit offsets part of the cost of caring for young children or other qualifying dependents while parents work or attend school. For workers, the credit effectively increases the net gain from work, which could boost their willingness to seek employment. That effect would only apply to the secondary worker in married couples since both parents in a couple must work or be in school in order to qualify for the credit. Because the credit is not refundable, however, it provides little or no benefit to low-income families, for whom the credit would offer the largest percentage increase in net wage and thus have the greatest impact on employment.
Compared against the credit provided in 2010, the proposal would increase the average CDCTC by about a third—from $513 to $700—at a cost of nearly $1.2 billion in lost revenue annually. Families with incomes under $30,000 would receive almost no benefit from the proposed change. Though they comprise nearly a third of all families with children, they receive less than 5 percent of benefits. About 85 percent of families with incomes between $30,000 and $50,000 who get the credit would see their taxes drop—by an average of $250. But most of the gains would go to families with income between $50,000 and $100,000. Virtually all of the more than 2 million families in that income range who claim the credit would see their taxes fall by an average of $360. Those families, who comprise about one-quarter of all families with children, would get nearly two-thirds of the tax savings from the proposed change.
1.The changes noted in the text are measured relative to credit amounts in 2011 with expiration of EGTRRA. Compared against the credit in 2010, the maximum gains would go to families with income between $43,000 and $85,000; families with income between $15,000 and $43,000 or between $85,000 and $113,000 would see smaller increases.
Tax Policy Briefing Book: Taxation and the Family: How does the tax system subsidize child care expenses?
Quick Facts: Child and Dependent Care Tax Credit (CDCTC)