The CDCTC is a tax policy intended to help offset a portion of families’ child or dependent care expenses by reducing their federal income tax liability. However, as we have written before, the existing structure of the credit fails to meaningfully help low-income families afford child care.
After two decades without any improvement, the American Rescue Plan is the first law to alter the CDCTC, making it work for the families that need the tax credit the most. For 2021, the law increases the maximum amount of child care expenses families can claim, from $3,000 to $8,000 per child; increases the percentage of those expenses for which families will receive a credit from 35% to 50%; and by making the credit fully refundable, ensures that these changes will benefit the lowest-income families who have little to no tax liability.
But these long overdue changes are temporary, only lasting through 2021. The underlying structure that for decades has failed to support the families who need the credit most, remains.
Our report, The Effects of the Child and Dependent Care Tax Credit on Child Care Affordability has two aims: first, to explain the significance of the American Rescue Plan’s changes in the context of the existing CDCTC structure. And second, to prompt an informed discussion on how to improve the CDCTC, and to ensure these changes are sustained for the families who can least afford quality child care.