Raising children is expensive. One of the biggest challenges many parents face is affording child care, which can make up 8% to 19% of median family income. In some cases, child care can cost more than college. However, there are two federal tax provisions designed specifically to help reduce the financial burden of child care for working parents (CDCTC and DCAP) and one to help businesses offer child care to their employees (45F).
|Dependent Care Assistance Program (DCAP)
|Allows employees to exclude up to $5,000 of dependent care assistance provided by their employer from their reported gross income. This may include direct payments by an employer for an employee’s child care tuition, or employer-sponsored Flexible Spending Accounts (FSAs).
|Employer-sponsored benefit program for working parents with child care expenses.
|Child and Dependent Care Tax Credit (CDCTC)
|Nonrefundable credit that allows eligible taxpayers to offset a portion of their out-of-pocket child and dependent care expenses necessary for work. Taxpayers can claim up to $3,000 in expenses for one dependent and $6,000 in expenses for two or more. The maximum credit rate is 35% of eligible expenses, and it phases down with income until it reaches 20%.
|Credit for working parents to help cover a portion of the cost of child care for children under age 13 or adult dependents.
|Employer-Provided Child Care Tax Credit (45F)
|Nonrefundable tax credit for employers of up to 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures. The credit maximum is $150,000.
|Credit for businesses to offset the cost of providing or subsidizing child care for their employees.
Each of these tax credits serve a unique purpose: DCAP and 45F help incentivize employers to become more involved in providing dependent care and child care for their employees and the CDCTC helps to reduce the costs of child and dependent care to the taxpayer.
- To allow all working parents to receive the full effects, employees should be able to claim the CDCTC up to the maximum allowable expenses for any out-of-pocket child care expenses, regardless of employer contribution.
- Eligible individuals should also be able to claim out-of-pocket expenses that are greater than the maximum DCAP contribution.
This change, when coupled with BPC’s previous recommendations to make the CDCTC more accessible to lower-income families, will help make child care more affordable for working parents.
Interactions between these tax codes have a substantial impact on working families’ bottom line. Understanding how these credits interact and why the DCAP and CDCTC should be delinked is essential as policymakers and other leaders design solutions to the child care crisis that work.
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