How the CDCTC Can Help Parents Afford Child Care

The CDCTC, enacted in 1976, is a tax policy that reduces families’ federal income tax liability—or the amount they must pay in federal income taxes each year. Families may claim up to $3,000 in care expenses per child or dependent for up to two children or dependents. The family, based on their income level, can then receive between 20-35% of those expenses back as their credit. The higher the families’ income, the lower percentage they are allowed to claim.

The American Rescue Plan (ARP) altered the CDCTC for 2021. The ARP:

• Increases the maximum amount of child or dependent care expenses families can claim from $3,000 to $8,000 per child or dependent;
• Increases the percentage of those expenses families will receive as a credit from up to 35% to up to 50%; and
• Makes the credit fully refundable.

Making the credit fully refundable is critical to better supporting low-income families. Ensuring low-income families are eligible to receive a tax credit for their child care expenses, even those with little or no tax liability, is another method of financial assistance so families can better afford the high costs of child care. To calculate how much your household might be able to receive, check out BPC’s CDCTC calculator.

The following describes key findings from the May survey. For the purposes of our analysis, low-income refers to incomes under $50k, middle-income refers to incomes from $50k-$100k, and high-income refers to incomes above $100k.

Although the CDCTC is widely available, less than half of parents (42%) report receiving it. Although low-income parents stand to benefit the most from financial assistance, low-income parents (42%) are less likely than middle- (52%) and high- (50%) income parents to report receiving the CDCTC for their child care expenses. Parents in suburban (44%) and urban (42%) areas are more likely to report receiving this tax credit than parents in rural (37%) areas.

Of those who had not received a tax credit, 24% said it was because they were not aware they could. Low-income families (28%) were more likely to report that they did not know they could receive this credit. The second-most reported reason (17%) for not receiving a credit was having no child care expenses. Lower-income families (31%) were much more likely to report no child care expenses.

The CDCTC is claimed annually during tax season based on the amount of money spent on child care through the year. As we detail in our report, The Effects of the Child and Dependent Care Tax Credit on Child Care Affordability, many low-income families do not receive the help they need to pay for childcare throughout the year—which is why we suggest making the CDCTC advanceable. Two-thirds (66%) of parents say they would prefer to receive the credit through periodic monthly reimbursements, indicating the difficulty of paying for child care throughout the year. Low-income (74%) parents are more likely than middle- (62%) and high- (65%) income parents to prefer these periodic reimbursements.

Despite the ARP’s important updates to the CDCTC, half (48%) of parents are unaware that they can claim more of their child care expenses on their 2021 taxes and receive a greater percentage back as a credit. High-income parents (57%) are more likely than low-income parents (47%) to be aware of these changes, even though many benefits are intended to support low-income families.

Although much more public education needs to occur around the CDCTC, tax credits are an effective way to help parents afford child care. Most parents prefer financial support via tax refunds (39%) or both government subsidies and tax refunds (39%). Middle-income parents (43%) are more likely than low-income (34%) and high-income (37%) parents to prefer only a tax refund. However, there are no strong income differentiations among other options.

Not only is high-quality child care unaffordable for many families, but many parents are uneducated about existing federal programs to help cover the costs. Policymakers tend to focus on expanding the Child Care and Development Fund (CCDF) as the main way to support families, but the often overlooked CDCTC is also important in helping families afford child care. Each dollar a family receives through this credit helps high-quality care become more affordable. However, programs like the CDCTC are only effective if parents know how they exist and take full advantage.