Child care is not a luxury for American families—it’s a necessity. Yet the costs associated with quality child care programs are rapidly outpacing other expenses faced by families, including the cost of higher education. Unfortunately, the only provision in the tax code created specifically to help families with the cost of child care is outdated, and is not available to most low-income families. As Congress debates its tax reform legislation, lawmakers have an opportunity to help working families by expanding the Child and Dependent Care Tax Credit, and making it refundable to ensure it reaches the families who need it most. Learn more.
While there are a handful of tax credits and deductions that support families with children, only the Child and Dependent Care Tax Credit (CDCTC) was designed to help working parents with the cost of work-related child care expenses.By expanding the CDCTC and making it refundable, policymakers have an opportunity to help address working families’ child care needs.
Nearly 15 million children under the age of six in the U.S. have working parents, and paying for child care presents a significant and growing burden to parents’ ability to enter, return, or remain in the workforce. Eliminating the CDCTC is not a tax cut American families want.
And according to a recent national poll, 81% of the electorate—including 74% of Trump voters—support providing a child care-specific tax credit to help parents better afford quality child care and early education programs, with low- and middle-income parents who need more help getting a larger credit.
Make the Child and Dependent Care Tax Credit (CDCTC) refundable for children under five years old.
Under current law, CDCTC provides a non-refundable tax credit of 20-35% of the first $3,000 spent on care for one child and the first $6,000 on care for two or more children (the value of the credit decreases as income increases). If the credit was refundable for children under five:
Current law would be brought up-to-par with actual costs for non-school aged children.
The credit would be expanded to additional low-income individuals who are not currently able to benefit from the credit due to limited tax liability.
Enhance the American Opportunity Tax Credit (AOTC), and allow it to be used for quality education programs for children under the age of five.
The AOTC is a $2,500 credit per student for costs related to post-secondary expenses, including tuition, fees, books, and supplies—up to $1,000 is refundable for low-income taxpayers. Expanding the AOTC to include expenses for early childhood education would:
Give parents a new tool to pay for quality programs.
Provide more parity in the tax code between higher education and education for non-school-aged children.
Expand the definition of “qualified institutions” for tax free scholarships.
Under current law, virtually all scholarships and tuition assistance programs are tax free, as long as the assistance is used for attendance at a “qualified institution”, generally defined as a primary, secondary, post-secondary or vocational. Expanding the definition of qualified institutions for tax free scholarships to include high-quality programs for children from birth through age five would:
Allow tax free scholarships, tuition reduction, and assistance for early childhood learning programs.
Incentivize scholarship opportunities for early learning and promote community philanthropy.
Increase limits on the Dependent Care Assistance Program (DCAP) and incentivize employers to contribute more to employee accounts.
The DCAP is an employer-sponsored program that provides reimbursements for up to $2,500 annually ($5,000 for married couples) to employees who pay for dependent care—employees are then allowed to deduct these dependent care expenses from their paycheck on a pre-tax basis. Access to DCAPs has remained relatively unchanged over the last five years; however, low-wage employees and service industry workers have significantly lower access. According to the Bureau of Labor Statistics National Compensation Survey (2014), 58% of professional and managerial workers have access to DCAP plans. In contrast, only 18% of service industry workers have similar plans. For low-wage workers, the number drops to 16%.
Current limits have failed to keep up with the rising costs of child care—increasing DCAP limits to $10,500 and indexing those limits to inflation would ensure that these plans effectively cover costs for families.
Providing tax credits for startup costs, similar to incentives for small business pension plans, would incentivize businesses to establish DCAP benefits—affording additional credits for employers who match employee contributions would encourage businesses to provide more generous benefits.
Looking Forward
Congress has made reforming the tax code a priority in 2017. As negotiations continue, FFYF will continue to advocate for smart reforms that benefit children and working families.
In July, FFYF submitted a letter to U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah), along with his colleagues on the Committee, urging them to consider policies like the ones described above that expand access for low- and middle-income families struggling to afford quality child care across America.
Smart tax policies that expand access to high-quality early child education and make quality child care affordable are not just good for kids—they help parents and help grow the American economy. Employee absenteeism due to child care issues causes U.S. businesses to lose $3 billion annually. When lawmakers craft policies that allow parents to be more productive workers, entire communities benefit.
The First Five Years Fund is proud to engage in the policy conversation with Congress about strengthening America’s stance on supporting its children, and we are committed to working with all stakeholders to ensure tax reform works for America’s working families. By allowing parents to provide their children with a solid foundation, we create an investment in our own future, and future generations to come.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept,” you consent to the use of ALL the cookies.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.