As tax season kicks into high gear, there is one critical tax credit that is the only credit exclusively that helps parents offset the high costs of child care expenses, the Child and Dependent Care Tax Credit (CDCTC). After years of not keeping pace with the rising cost of child care, the CDCTC was recently expanded under the American Rescue Plan (ARP) for one year, to become a fully refundable credit that provides families with a maximum credit of $8,000 (50% of $16,000 in expenses) for two or more children.
Prior to ARP, the CDCTC was non-refundable and provided a maximum credit of $2,100 (35% of $6,000 in expenses) to families with 2 or more children and an adjusted gross income (AGI) of up to $15,000. It also included a phaseout threshold beginning at $15,000 with the percentage of eligible expenses decreasing by 1 percent (to a minimum of 20%) for each $2,000 by which the AGI exceeds $15,000. After passage of ARP, the phaseout threshold increased from $15,000 to $125,000, and an additional phaseout of 0-20% was added for those with an AGI above $400,000, up to $500,000 in income. For example, in previous years, a family with a household income below $125,000 paying over $8,000 for care for one child would have received $600. Under the expanded CDCTC, the same family will receive $4,000. This April, families will finally be able to feel the impact of the expanded CDCTC as they file their taxes for the previous year.
As the pandemic continues to place a financial strain on families and child care costs continue to rise – even exceeding the national inflation rate – the importance of the CDCTC to improve affordability cannot be overstated. To underscore its importance, Senator Bob Casey (D-PA) led a letter to Vice President Kamala Harris and Treasury Secretary Janet Yellen to encourage them to include the CDCTC in the Biden administration’s tax outreach and awareness campaigns so that more families can benefit from this important tax credit. For a tool to help calculate how much your family could receive with the enhanced credit under APR, the Bipartisan Policy Center has developed this CDCTC calculator. Over the years, there have been multiple legislative proposals introduced in Congress to strengthen the CDCTC, including the Child and Dependent Credit Enhancement Act and the bipartisan PACE Act.
For a more in-depth discussion about the CDCTC, FFYF’s explainer here.