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The First Five Things to Know: The Child and Dependent Care Tax Credit

Resource April 13, 2023

For millions of working parents with small children, child care is a major expense. It is also a necessary expense, as many parents are unable to work without it. The Child and Dependent Care Tax Credit (CDCTC) – created in 1976 and last extended in 2017 – allows families to offset child care costs, but it needs to be modernized.

Here are the first five things to know about the CDCTC.

Child care is a major expense for working families with small children. A recent report from the Department of Labor said, as a share of family income, child care prices today are “untenable.”   In 34 states, the average cost of child care for infants is more than in-state, public college tuition. In 44 states, the cost of child care for two children is more than the average mortgage. And households under the poverty line spend nearly a third of their income on childcare.  

The CDCTC helps parents pay for child care so they can work. The CDCTC allows working parents to keep more of what they make and helps offset the high cost of child care. Parents can claim a percentage of expenses to help cover the cost of care for children under the age of 13 or adult dependents. For example, a maximum credit of $2,100 per year (35% of $6,000 in expenses) is available to families with two or more children.

(Don’t confuse the CDCTC for the CTC, which fills a different set of needs for parents.) The CDCTC is the only provision of the tax code specifically created to help working parents pay for child care. The other credit, the “Child Tax Credit,” can be used to offset any costs associated with raising a child; according to recent data, the most common ways parents use the CTC is to pay for basic needs including food, utilities, rent, and clothing.

But the CDCTC doesn’t reach enough of the families who need it. The CDCTC, however, has remained relatively unchanged for the past two decades, even as the average price of child care has increased by 214% since 1990. It is also currently not “fully refundable,” which means it can only reduce a tax bill to zero (and not provide the difference as a refund.) This leads to many low-income families not receiving the full value of the benefit.

Congress has the power to strengthen this tax credit so it helps more families afford for the child care they need to work. The CDCTC supports working families who need child care, but it must be strengthened so it reaches more of the families who need it most. This includes a bipartisan agreement to expand the value of the credit, so it better responds to the actual cost of child care in the nation today. And making it fully refundable, so low-income working families who owe little federal tax will still receive the full benefit.

The Bottom Line: The CDCTC, a policy with strong bipartisan support, helps working parents recoup some of their costs for child care. Congress should pursue all available options to help ease the burden of the skyrocketing cost of child care for working families. This includes increasing the value of the CDCTC and making it refundable to ensure it helps the working families who need it most. By strengthening the CDCTC, Congress can both lower child care costs for working families, and help more parents stay in the workforce – ultimately fortifying our nation’s economy.

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