Taxation and the Family: How does the tax system subsidize child care expenses?
Working parents can utilize two primary tax benefits to offset child care costs: the child and dependent care tax credit (CDCTC) and the employer-provided child care exclusion. To receive the CDCTC, parents report up to $3,000 of expenses per child (to a maximum of $6,000) and receive a credit of between 20 and 35 percent of that amount, depending on their adjusted gross income (AGI). Higher credit rates are available to families with lower incomes. To benefit from the exclusion, employees arrange with their employer to exclude up to $5,000 from their salary, regardless of the number of children receiving care. These dollars are pre-tax. Higher-income families generally benefit more from the exclusion than from the credit, since the excluded income avoids both income and payroll taxes, but it is only available to those taxpayers whose employers offer it.
Although the same expenses cannot be used to claim both the CDCTC and the exclusion, in some cases, parents can benefit from both provisions. If a parent’s child care expenses exceed the amount excluded from income, these excess expenses may be applied to the CDCTC, provided the total expenses claimed under both provisions do not exceed the maximum eligible amount under the CDCTC. For example, families with two or more children excluding the maximum $5,000 can still claim a CDCTC for an additional $1,000 of expenses, so long as their total child care expenses are at least $6,000.
- To benefit from the CDCTC, both parents must be working or in school. The expenses claimed may not exceed the lower-earning parent’s earnings. The exclusion, however, can be used even if only one parent is working.
- The highest credit rate for the CDCTC (35 percent) applies to families with AGI below $15,000 and decreases by 1 percentage point for each additional $2,000 of AGI. The lowest credit rate (20 percent) applies to families with AGI greater
- In 2013, TPC estimates that among families claiming the CDCTC, the largest average benefits will go to those with incomes between $100,000 and $200,000. People in the highest income quintile received the greatest share of benefits, both because their average expenses are higher than other income groups and because more people in this quintile have child care expenses (figure 1).
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