Financing Child Care in the United States - Ewing Marion Kauffman ...

TAX CREDITS, DEDUCTIONS
AND EXEMPTIONS
CHILD AND DEPENDENT CARE TAX
CREDIT (FEDERAL)
DESCRIPTION
The federal Child and Dependent Care Tax Credit
(CDCTC) allows all families with child care expenses to
claim a credit against federal taxes owed equal to a
percentage of their employment–related expenditures for
any form of child care. Children must be under age 13
and live with the parent(s) claiming the credit. The law
limits creditable expenses to $2,400 for one child and
$4,800 for two or more children. The expense limits were
set in 1981 and reflected average prices for care at that
time. The credit is not indexed for inflation as other parts
of the tax code are (e.g., the personal exemption,
standard deduction and earned income tax credit).
The credit declines as income rises:
Adjusted gross income
below $10,000 30%
$10,001–$12,000 29%
$12,001–$14,000 28%
$14,001–$16,000 27%
$16,001–$18,000 26%
$18,001–$20,000 25%
$20,001–$22,000 24%
$22,001–$24,000 23%
$24,001–$26,000 22%
$26,001–$28,000 21%
above $28,000 20%
Percentage of
eligible expenses
allowed as credit
The maximum credit of $720 for families with one child,
or $1,440 for families with two or more children, is
available to families with incomes below $10,000, as long
as these families have spent up to the limits of eligible
child care expenses. However, in practice, virtually none
of these families can claim the maximum credit because
families with incomes that low are unlikely to be able to
spend to the expense limit, and they often have no tax
liability. In 1999, a one–parent family with one child would
not owe federal income taxes until its income exceeded
$11,850. The maximum credit for families with incomes
over $28,000 is $480 for families with one child and
$960 for families with two or more children.
WHEN ESTABLISHED
The 1954 revisions to the federal tax code added a
provision to allow a tax deduction for certain
employment–related child/dependent care expenses. The
deduction was converted to a credit in 1976. Expense
limits were raised, the sliding scale was established, and
the maximum credit was raised to 30 percent, beginning
with tax year 1982. In tax year 1983, the credit became
available to taxpayers filing the “short” tax form (1040A).
ANNUAL AMOUNT
The estimated federal revenue loss associated with the
CDCTC was $2.5 billion in federal tax year 1997, the
most recent year for which Internal Revenue Service data
were available. That was significantly lower than
comparable levels for 1988, when the cost of the CDCTC
was $3.8 billion. The federal Family Support Act of 1988,
among other changes, modified the Internal Revenue
Code to provide that a taxpayer would not be eligible for
the CDCTC unless the tax return included the name,
address and taxpayer identification number of the
dependent care provider. The number of returns claiming
the CDCTC dropped from 9 million in 1988 to 6 million
in 1989. In 1997, 5.4 million taxpayers claimed the
CDCTC.
SERVICES FUNDED
Generally, the credit can be claimed for any form of
child care, in–home or out–of–home, that is related to
employment. (Employment–related expenses are
expenses incurred while the parent is gainfully employed
or looking for gainful employment. If the parent is married,
her or his spouse must also be employed or looking for
employment, unless the spouse is a full–time student or
incapable of self–care.) If the childcare provider cares
for more than six children, the provider must comply with
applicable state and local laws and regulations. The
taxpayer must have paid for the care and must supply the
name and taxpayer identification number of the person
or organization that provided the care. The cost of care
claimed cannot exceed the earned income of the
lower–earning spouse.
HOW FUNDS DISTRIBUTED
Expenditures are made throughout a year, and the tax
credit is claimed on the annual income tax return for that
year, which is due in mid–April of the following year.
Rather than receiving a larger refund long after having
paid for the child care, taxpayers who can predict their
child care costs may choose to adjust their federal tax
withholding amounts to account for the credit, thus
receiving the benefits throughout the year.
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