By Amy Matsui, Senior Counsel and Director of Government Relations, National Women’s Law Center
As Congress turns its attention from health care to tax policy, policymakers need to keep working families in mind. Tax credits for working families, like the Child and Dependent Care Tax Credit (CDCTC), help them make ends meet, and should be preserved – if not expanded – in any proposal to change the nation’s tax policies.
High-quality child care is fundamental to the economic security of women and families, but it is out of reach for too many households. When parents cannot afford child care, they may face challenges getting and keeping a job. Lack of access to high-quality, affordable child care is especially difficult for women, who are often paid less than men, and who are more likely to work in part-time jobs and to be single parents.
For over 60 years, the tax code has recognized the child care expenses parents incur in order to work. The CDCTC is a nonrefundable tax credit that helps families meet their out-of-pocket, work-related child and dependent care expenses.
Here’s how it works:
- Families can claim up to $3,000 of their work-related child and dependent care expenses for one child or dependent, and up to $6,000 for two or more children or dependents.
- The credit is calculated as a percentage of those expenses. The percentage of expenses that a family may claim is based on a sliding scale. Families with an Adjusted Gross Income (AGI) of $15,000 or less are eligible for a credit equal to 35 percent of eligible expenses. The rate decreases as AGI increases until it reaches 20 percent for families with AGIs above $43,000.
The CDCTC is the only federal tax credit that specifically addresses the additional care expenses that parents must pay when they work, look for work, or (in some cases) go to school. However, almost 65 percent of the benefits received by all families from the CDCTC in 2016 were estimated to accrue to families with AGIs above $60,000 in 2016.
Improving the federal CDCTC would help the families who need it most. Here’s how:
- Make the CDCTC refundable to provide more benefit to low- and moderate-income families.
Because the CDCTC is not refundable, low-income families with little or no federal tax liability get little or no benefit from the credit. Making the CDCTC refundable would allow over a million additional families to receive tax assistance from the credit and would increase the value of the credit for many moderate-income families.
- Increase the percentage of expenses and the income level for the maximum percentage to help low- and moderate-income families. Currently, families with AGI over $43,000 only receive 20 percent of their eligible care expenses, even though families at this income level struggle to pay for child care. Expanding the sliding scale would increase tax assistance to families who most need help.
- Increase the child care expense limits to reflect the rising costs of child care. The average annual costs of child care, which equal the cost of in-state college tuition in many states, far exceed the child care expense limits for the CDCTC. As a result, the tax benefits that families can claim do little to offset the child care costs that they actually incur. Increasing the child care expense limits would help families at all income levels whose expenses exceed the current limits.
- Index the expense limits and income levels on the sliding scale for inflation, to prevent the CDCTC from losing value over time.
Paired with a significant additional investment in direct child care assistance through the Child Care and Development Block Grant (CCDBG), an improved CDCTC would help more families afford the high-quality child care they need.
There is bipartisan support for improving the CDCTC. And improvements to family tax credits like the CDCTC would make the tax system fairer and more progressive. But it’s important to remember that any improvements to family tax credits must be evaluated in context of the larger tax package in which they are proposed. Even the most generous improvements to the CDCTC would not counterbalance the harm that a tax proposal whose benefits overwhelmingly go to the wealthy and corporations would cause to working families.