New Analysis Finds CDCTC Powerful Mechanism for Helping Working Families Afford Child Care

Washington, DC – The Child and Dependent Care Tax Credit, or CDCTC, is an important but often overlooked element of the child care landscape. Not to be confused with the well-known Child Tax Credit, the CDCTC helps families offset a portion their child or dependent care expenses by reducing their federal income tax liability. Despite its importance, a new report released today by the Bipartisan Policy Center finds the CDCTC primarily benefits only a subset of working families—not the low- and moderate-income families in greatest need of the support.

The American Rescue Plan was the first law in two decades to alter the CDCTC, but changes are only applicable for one year. BPC’s new report models the potential benefits working parents may receive from the CDCTC under the American Rescue Plan and back under the original structure of the credit. For example, a family of four with an annual income of 60,000 that pays $14,300 a year in child care costs—which roughly averages $275 a week—could potentially see its credit amount increase from $1,200 per year to $7,150 per year.

“While the pandemic motivated these changes to the credit for 2021, parents have long-faced obstacles affording child care,” said BPC’s Director of the Early Childhood Initiative Linda K. Smith. “The CDCTC is an important facet of the child care system that policymakers should take into consideration when looking for solutions to help our nation’s working families, businesses, and economy. The temporary changes in the American Rescue Plan should be a basis for conversations about how to permanently align the tax credit so that it works best for the families who need it the most.”

The Effects of the Child and Dependent Care Tax Credit on Child Care Affordability identifies several key opportunities for enhancement:

1. As recommended in A Bipartisan Case for Early Childhood Development, make the credit fully refundable.
2. Consider enhancing the credit rate for the lowest-earning families, but phase out the rate for higher-income families.
3. Ensure that changes (1) and (2) coincide with a Child Tax Credit that is calculated independent of federal income tax liability.
4. Consider making the CDCTC advanceable.
5. Consider decoupling Dependent Care Assistance Plan exclusions from CDCTC expenditures for low-income workers.

The problem of child care unaffordability existed before the pandemic, and the deeper reason for the lack of affordability remains unchanged: Parents cannot afford to pay the rates providers need to charge to cover the costs associated with providing quality care.

The report recommends policymakers and advocates expand their focus to include the tax code in any conversations about how to help low-income families afford child care. The report concludes, “To build a comprehensive system of child care support for families beyond the current health crisis, it is time that we harness and refine all available mechanisms that can assist families; the CDCTC is one such powerful mechanism.”

Download the new report and fact sheet here.