Expand the Child and Dependent Care Tax Credit
The child and dependent care tax credit (CDCTC) provides a credit of between 20 and 35 percent of up to $3,000 ($6,000 for two or more children) in child care 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 nonrefundable—that is, it can only reduce a family’s income tax liability to zero; any additional credit is lost.
Absent further extension by Congress, the CDCTC will revert to its pre-EGTRRA 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 to $2,400 (from $6,000 to $4,800 for two or more children). 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 $75,000 the income threshold above which the credit rate starts to phase down beginning in 2012. That rate would decrease by 1 percentage point for each $2,000 of income (or part thereof) over that threshold until it hits a minimum of 20 percent for families with income over $103,000. Relative to 2011 law, for families with income between $43,000 and $75,000, 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 $15,000 and $43,000 or between $75,000 and $103,000 would see smaller increases in the maximum credit they could claim.
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—those most likely to react to a credit change. These families receive little or no benefit, regardless of the credit rate.
More than half of benefits from extending the phase-out would accrue to families in the middle income quintile. Because it is nonrefundable, the larger credit would do almost nothing for families in the bottom fifth of the income distribution, and only about 17 percent of the benefits would accrue to families in the second quintile.*Expanding the credit would cost an estimated $9.6 billion over 10 years.
Raise the Child and Dependent Care Tax Credit Phaseout Threshold to $75,000
2013 versus current policy by cash income
2013 versus current policy by cash income percentiles
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).
*The changes noted in the text are measured relative to credit amounts in 2011 without expiration of EGTRRA (see table