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tax topics

Child care credit

Originally published in the NTA Encyclopedia of Taxation and Tax Policy, Second Edition, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle. The encyclopedia is available in paperback from the Urban Institute Press. Order online at or call toll-free 1-877-847-7377

Amy E. Dunbar
University of Connecticut Department of Accounting

A nonrefundable credit based on employment-related expenses of household-type services for the care of children under age 13, a disabled spouse, or other dependent.

The Internal Revenue Code provides tax benefits in the form of a credit or exclusion for child care expenses incurred by taxpayers deemed to be gainfully employed. The credit was enacted in the Tax Reform Act of 1976 by repealing Section 214, which allowed an itemized deduction for child care expenses, and replacing it with Section 44A (redesignated as Section 21 by the Tax Reform Act of 1984). The Section 129 dependent care exclusion for assistance from employers was enacted by the Economic Recovery Tax Act of 1981 and subjected to a $5,000 cap by the Tax Reform Act of 1986.

Both the credit and the exclusion are subject to earned income ceilings that limit the qualified child care expenses in any taxable year to an amount not in excess of the earned income of the employee, or if the employee is married, the lower of the employee’s earned income or the earned income of his or her spouse. Thus, these benefits generally are not available to oneearner couples. (Spouses who are full-time students or incapable of caring for themselves are deemed to earn a monthly amount equivalent to 1/12 of the maximum child care expenses.)

Congress has made several changes to Sec. 21, effective 1982, 1989, and 2003, as shown in table 1. From 1976 to 1981, a credit of 20 percent of qualified child care expenses was allowed with a maximum credit of $400 for each of the taxpayer’s first two dependents. The 20 percent credit was the same for all taxpayers. In an effort to make the credit more progressive, Congress enacted a sliding scale credit in 1982. From 1982 to 1988, the credit was 30 percent of qualified expenses for taxpayers with incomes of $10,000 or less. The credit is reduced by 1 percent for each $2,000 or fraction thereof of income above $10,000. For taxpayers with adjusted gross income (AGI) above $28,000, the credit rate is 20 percent. The Family Support Act of 1988 increased the allowable expense limit to $2,400 from $2,000 for one child and to $4,800 from $4,000 for two or more children. Expenses, however, only qualified if the child was under age 13 (rather than 15 before 1989). In addition, eligible expenses were reduced, dollar for dollar, by the amount of expenses excludable from the taxpayer’s income under the dependent care exclusion. The Economic Growth and Tax Relief Reconciliation Act of 2001 increased both the rate and the allowableexpenses, as shown in table 1, for the years 2003 through 2010. In 2011, the child care credit will be determined under the rules in effect for 2002.


Table 2 reports the total child care credits and total credits claimed in selected years on all returns filed as reported by Publication 1304, "Individual Income Tax Returns." The child care credit represents a large portion of the total credits claimed, increasing from 1979 to 1988. In 1989, the net effect of the Family Support Act of 1988 reduced the total child care credits claimed. ("Total credits" as reported in Publication 1304 do not include the earned income credit that was refunded or offset against taxes other than income taxes. For example, in 1988, individual taxpayers paid approximately $413 billion in income tax after credits and received $12 billion in credits, including $5 billion of earned income credit, of which $4 billion was child care credit. The large increase in "total credits" in 1999 is due to the Sec. 24 child tax credit.)


Empirical research

Prior research has focused primarily on the issue of child care credit progressivity because Congress has addressed such progressivity several times. (Whether the child care credit should be evaluated based on progressivity concerns is addressed by Steuerle 1998.) The 1976 conversion of a deduction to a credit and the 1982 change to a sliding scale credit were intended to increase the credit’s progressivity. In the Revenue Reconciliation Act of 1989 debates, Congress again addressed the perceived regressivity of the credit, but no changes to the credit were enacted at that time.

Using tax return data, Dunbar and Nordhauser’s (1991) examined the progressivity of the child care credit by considering the impact of the credit on the income distribution using the Kakwani and Suits indices. A comparison of the Kakwani and Suits tax indices is provided in Formby, Seaks, and Smith (1984). (See progressivity, measures of). They concluded that the child care credit contributes to the overall progressivity of the federal income tax. The tax law change in 1982 increased the progressivity of the child care credit, although the lower deciles continue to reflect regressivity. Many taxpayers are in the lower deciles because they are in one-earner families. If such taxpayers are married, they are generally precluded from claiming the credit.

Altshuler and Schwartz (1996) also use tax return data to examine the progressivity of the credit, but they use a lifecycle approach. They compute the Suits index using both annual and "time-exposure" income to measure ability to pay.

They conclude that the credit is progressively distributed, but replacing the annual with time-exposure income increases the proportion of the credit received by lower-income taxpayers.

Gentry and Hagy (1996) examine the distributional effects of both the credit and the exclusion using both the 1989 National Child Care Survey and tax return data. They provide a discussion of the rationales for tax treatment of child care, providing equity and efficiency arguments for and against tax provisions for child care. They note that previous literature focused primarily on the vertical equity, while their research also captures some horizontal equity concerns. They find that among families that use tax relief for child care expenses, the benefits average 1.24 percent of family income. Benefits as a percentage of income vary systematically over the income distribution. Despite being regressive at low income levels (mainly due to the credit being non-refundable), tax relief is progressively distributed over most of the income distribution with the ratio of benefits to income falling above the bottom quintile of the income distribution. The benefits of tax relief also vary among families with the same income depending on a family’s structure and its labor market and child care choices.

Using data from the 1986 National Longitudinal Surveys of Labor Market Experience of Youth, Averett, Peters, and Waldman (1997) focus on the effect of the credit on labor supply. They examine the effects of the credit on the labor supply decisions of married women with young children, finding that the elasticity of labor supply is close to 1. Their policy simulations show that the credit substantially increases labor supply.

Prior research generally finds that the tax expenditure for the child care credit is distributed progressively and does increase the labor supply. If Congress wishes to increase the progressivity of the credit, the credit could be increased further for low-income taxpayers (which was done effective 2003) or the credit for high-income taxpayers could be phased out.


  • Altshuler, Rosanne, and Amy Ellen Schwartz. "On the Progressivity of the Child Care Tax Credit: Snapshot versus Time-Exposure Incidence." National Tax Journal 49 (1996): 55-71.
  • Averett, Susan L., Elizabeth Peters, and Donald M. Waldman. "Tax Credits, Labor Supply, and Child Care." The Review of Economics and Statistics 79 (1997): 125-35.
  • Dunbar, Amy, and Susan Nordhauser. "Is The Child Care Credit Progressive?" National Tax Journal 44 (1991): 519-28.
  • Formby, John P., Terry G. Seaks, and W. James Smith. "Difficulties in the Measurement of Tax Progressivity: The Case of North America." Public Finance 39 (1984): 297-313.
  • Gentry, William M., and Allison P. Hagy. "The Distributional Effects of the Tax Treatment of Child Care Expenses." In Empirical Foundations of Household Taxation, edited by Martin Feldstein and James M. Poterba (99-128). Chicago: University of Chicago Press, 1996.
  • Kakwani, Nanok C. "Measurement of Tax Progressivity: An International Comparison." Economic Journal 87 (1976): 71-80.
  • Steuerle, C. Eugene. "Systematic Thinking About Subsidies for Child Care." Tax Notes 78 (1998): 749.
  • Suits, Daniel. B. "Measurement of Tax Progressivity." American Economic Review (September 1977): 747-52.