Working families who claim the Child and Dependent Care Tax Credit (CDCTC) might be surprised when their IRS tax refund is lower than last year.
What is the CDCTC?
The CDCTC is a tax credit designed to help working families afford the high cost of child care so that parents can look for work and stay employed. This credit allows working parents to claim up to $6,000 in child care expenses for two children. Eligible families receive 20-35% of claimed expenses as a non-refundable credit.
Why Are Rates Lower in 2023?
The American Rescue Plan included a temporary expansion of the CDCTC for eligible families when they filed their taxes in 2021. Below is a summary of the changes made under the ARP expansion.
Changes under the ARP expansion were a first step towards making the credit equitable. Now that it has expired, we are back at square one.
Now that these changes have expired, working families may receive a smaller credit. Because the credit is nonrefundable, lower-income families without tax liability are not able to receive the CDCTC. It also has been shown to provide larger benefits to higher income families, in part because those with lower incomes spend less on child care throughout the year and therefore have less to apply to this credit on their annual taxes. .
Calculate the Difference
See how much you could receive under the CDCTC by using our calculator below. For more on what expenses might count, and for other FAQ’s, please view the IRS website on this topic.
Child and Dependent Care Tax Credit
American Rescue Plan for 2021
Families are impacted differently by these changes depending on the number of children they have, the amount they spend on child care, and their income.
Why Does This Matter?
Even though pandemic-era funding has ended, the child care affordability crisis has not.
The U.S. Department of Labor recently released the most comprehensive study of child care prices in the nation to date. They found that the price for child care can range from $5,357 to $17,171, depending on location and type of care. The average cost of care in some regions would comprise up to 19.3% of median family income. The study found that increases in median child care prices were associated with lower maternal employment rates.
Instead of reverting back to a flawed tax credit, we need to build off the American Rescue Plan’s temporary expansion and further support working families. There are several key changes that can help make the credit work for the families who need it most:
- Make the credit fully refundable. This is the single most effective way to ensure the lowest-income families receive the CDCTC.
- Consider significantly enhancing the credit rate for the lowest-earning families but phase out the rate for higher-income families. If the credit is fully refundable, this rate enhancement will yield higher credits for low-income working families without providing additional benefits to the families that can already afford child care.
- Ensure that changes (1) and (2) above coincide with a CTC that is calculated independent of federal income tax liability. If a family claims both credits, the increased CDCTC may decrease the amount a family receives from the CTC, effectively cancelling any net gains.
- Consider making the CDCTC advanceable.
- Consider decoupling dependent care assistance plan (DCAP) exclusions from CDCTC expenditures for low-income workers. Doing so would enable low- to middle-income workers to take a DCAP exclusion for activities like employer-sponsored care or set-asides for a flexible spending account without reducing the maximum amount of expenses they can claim for the CDCTC.
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