The Child and Dependent Care Tax Credit helps working families cover the high costs of child or dependent care so that parents are able to look for work and stay employed. The American Rescue Plan updated the CDCTC to try and address these realities, but only for 2021. Although our latest survey found that many parents are interested in receiving tax credits to help pay for child care, it also found that 48% of families—and 53% of families making under $50,000—were unaware they could claim more child care expenses under the CDCTC during 2021.
Child and Dependent Care Tax Credit
*Families may count a maximum of $8,000 in expenses per child or dependent towards this credit, and no more $16,000 in total, even if their actual expenses are greater than these amounts.
As the calculator shows, the expanded CDCTC for 2021 significantly increases the amount families can receive when they file their taxes for 2021. The American Rescue Plan expanded the amount of child care expenses families can claim per child from $3,000 to $8,000 (for a maximum of two children) while increasing the percent of those expenses families can receive as their credit. As policymakers consider long-term changes for CDCTC, it is important to understand how families with different incomes might benefit from this credit and what impacts certain policy changes could have. To do so, we examine how this credit affects families from three different income levels, under the structure in place prior to and during 2021.
Three families, the Hamiltons, the Madisons, and Jays, live in Arizona, each with a 9-month-old and a 4-year-old. In each family, both parents need full-time child care for their children.
Because of their varied income levels, each family receives a different percentage of their child care expenses back as a credit at the end of the year.
As we have previously written, before the ARP was passed, the credit largely benefited 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. Additionally, although lower-income families were eligible for a higher credit rate, families without tax liability were not able to receive the CDCTC as a credit and therefore, often received no benefit at all.
The comparison between these three families indicates how policymakers should be thinking about making permanent changes to the credit beyond 2021. Building off the American Rescue Plan’s temporary tax provisions, a combination of several key changes to the existing CDCTC structure beyond 2021 can better align the tax credit so that it works best for the families who need it the most:
- As recommended in A Bipartisan Case for Early Childhood Development, make the credit fully refundable.
- Consider enhancing the credit rate for the lowest-earning families but phase out the rate for higher-income families.
- Ensure that changes (1) and (2) coincide with a Child Tax Credit that is calculated independent of federal income tax liability.
- Consider making the CDCTC advanceable, paid throughout the year in monthly or quarterly installments.
- Consider decoupling Dependent Care Assistance Plan exclusions from CDCTC expenditures for low-income workers.
To build a comprehensive system of child care support for families beyond the current health crisis, it is time to harness and refine all available mechanisms that can assist families. The CDCTC is one such powerful mechanism. To learn more, read our full report.
1 This should be used for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Individuals interested in pursuing this credit should consult their own tax, legal, and/or accounting advisors.