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Quick Facts: Child and Dependent Care Tax Credit (CDCTC)

  1. What is the CDCTC?
  2. Who benefits from the CDCTC?
  3. How has the CDCTC changed over time?
  4. What will happen to the CDCTC after 2010?
  5. Do states reduce income taxes for families with childcare expenses?
  6. What changes does President Obama propose for the CDCTC?
  7. How else might we expand the CDCTC?
  8. Historical data on CDCTC benefits and taxpayers



1. What is the CDCTC?

The Child and Dependent Care Tax Credit provides a credit of between 20 percent and 35 percent of up to $3,000 ($6,000 for two or more children) of childcare expenses for children under age 13 whose parents work or go to school. Families with income below $15,000 qualify for the 35 percent credit. That rate falls by 1 percentage point for each additional $2,000 of income (or part thereof) until it reaches 20 percent for families with income of $43,000 or more.

The credit is non-refundable—that is, it can only reduce a family’s income tax liability to zero; any additional credit is lost. As a result, low-income families who owe little or no income tax get little benefit from the credit.

CDCTC_2010

Briefing book entry on CDCTC:
http://www.taxpolicycenter.org/briefing-book/key-elements/family/child-care-subsidies.cfm

IRS information:
http://www.irs.gov/taxtopics/tc602.html



2.
Who benefits from the CDCTC?

Families with children and income between $75,000 and $200,000 benefit most from the credit: they make up 30 percent of all families with children and get more than a third of the total credits. About half of all families have income under $50,000; they get less than 30 percent of total CDCTC.

CDCTC_distribution

Families receiving CDCTC in 2010:
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=2616



3. How has the CDCTC changed over time?

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) raised the CDCTC’s top credit rate from 30 percent to 35 percent, boosted the maximum childcare expenses eligible for the credit from $2,400 to $3,000 (double those amounts if a family has two or more children), and increased the threshold above which the credit rate declines from $10,000 to $15,000. Those changes, which are scheduled to expire in 2011 along with all other provisions of EGTRRA, increased the value of the credit for about 3.5 million families in 2006, boosting the average credit by a fifth from $450 to $540.

How CDCTC parameters change over time:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=580

Effects of EGTRRA on average CDCTC benefits (2006):
http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=1564




4.
What will happen to the CDCTC after 2010?

Unless Congress extends EGTRRA beyond its scheduled expiration at the end of 2010, the CDCTC will revert to its previous maximum credit rate of 30 percent for families with income under $10,000 with that rate falling by 1 percentage point for each additional $2,000 of income until it reaches 20 percent for families with income of $28,000 or more. In addition, the maximum expenditures for which taxpayers can claim the credit will fall from $3,000 ($6,000 for two or more children) to $2,400 ($4,800).

CDCTC_2011

How CDCTC parameters change over time:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=580

If Congress allows the CDCTC provisions of EGTRRA to expire as scheduled in 2011, about 2 million families with children will lose the credit entirely and another 2.4 million will see the value of their credit fall. Affected families will incur tax increases averaging about $340. Two factors would contribute to those changes. First, the lower maximum credit rate and allowed creditable expenditures would cut the value of the credit by as much as 31 percent. Second, the CDCTC would no longer count against the alternative minimum tax. That would deny the credit entirely to many upper middle-income families, particularly those with income between $75,000 and $500,000.

CDCTC_EGTRRA

Effects of EGTRRA sunset on CDCTC:
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=2612



5.
Do states reduce income taxes for families with childcare expenses?

More than half of the states and the District of Columbia provide income tax credits or deductions for allowable childcare expenses. Most states allow a credit equal to a percentage of the federal credit. Others allow a credit or deduction for some or all of childcare expenses.

State child and dependent care tax provisions:
http://www.taxpolicycenter.org/taxfacts/Content/PDF/state_child_care.pdf



6.
What changes does President Obama propose for the CDCTC?

President Obama proposes to increase the income limit for the maximum 35 percent credit to $85,000. The credit rate would phase down by 1 percentage point for each $2,000 of income over that threshold until it hits a minimum of 20 percent for families with income over $113,000. The maximum creditable expenses would remain at $3,000 for one child and $6,000 for two or more children. For families with income between $43,000 and $85,000, the maximum credit would increase from $600 to $1,050 (from $1,200 to $2,100 for families with two or more children).

White House Fact Sheet describing changes to the CDCTC:
http://www.whitehouse.gov/sites/default/files/Fact_Sheet-Middle_Class_Task_Force.pdf

CDCTC_Pres

CDCTC_10_11_pres_Graph-2

Compared against the current credit, the proposal would increase the average credit by about a third from $513 to $700 at a cost of nearly $1.2 billion in lost revenue annually. Families with incomes under $30,000 would receive almost no benefit from the proposed change. Though they comprise nearly a third of all families with children, they receive less than 5 percent of benefits. About 85 percent of families with incomes between $30,000 and $50,000 who get the credit would get an average tax cut of $250. But most of the gains would go to families with income between $50,000 and $100,000. Virtually all of the more than 2 million families in that income range who claim the credit would see their taxes fall by an average of $360. Those families, who comprise about one-quarter of all families with children, would get nearly two-thirds of the tax savings from the proposed change.

CDCTC_Pres_Effects

TPC tables concerning proposal
Revenue effects:
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=2599

Effects on taxpayers by cash income level:
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=2602

Effects on taxpayers by cash income percentiles:
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=2603

Comparison of proposal vs. extension of 2010 CDCTC provisions:
http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=2613

All TPC tables related to proposal:
http://taxpolicycenter.org/numbers/displayatab.cfm?template=simulation&SimID=352




7.
How else might we expand the CDCTC?

One proposal to expand the CDCTC would make the credit fully refundable so low-income families could take full advantage of it; increase expense limit to $5,000 for one child and $10,000 for two or more children and index both limits for inflation; increase the maximum credit rate to 50 percent; index for inflation the income threshold above which the credit rate phases down; and increase the rate at which the credit rate phases down to 1 percentage point for each $1,000 of income over the threshold. The credit rate would thus decline from 50 percent for families with income under $30,000 to 20 percent for families with income over $49,000.

Distribution and revenue tables concerning proposal:
http://www.taxpolicycenter.org/numbers/displayatab.cfm?Simid=320

The Tax Policy Center has examined other ways to improve the CDCTC. See

Tax Subsidies to Help Low-Income Families Pay for Child Care, Tax Policy Center Discussion Paper 23, June 2005
http://www.taxpolicycenter.org/UploadedPDF/411190_TPC_DiscussionPaper_23.pdf

Tax Credits to Help Low-Income Families Pay for Child Care, Tax Policy Issues and Options, Number 14, July 2005
http://www.taxpolicycenter.org/UploadedPDF/311199_IssuesOptions_14.pdf




8.
Historical data on CDCTC benefits and taxpayers

Dependent Care Tax Credit: Number of Families and Amount of Credit, 1976-2007
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=180