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Tax Credits to Help Low-Income Families Pay for Child Care
Brief #14 from the series Tax Policy Issues and Options
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Note: This report is available in its entirety in the Portable Document Format (PDF).
When Congress enacted welfare reform, it expected more people, particularly single mothers, to enter the labor force and exit welfare (Weil 2002). These new low-income workers face enormous challenges. Key among them is how to pay for decent child care.
Within the broad area of child care tax and subsidy policy, this brief focuses on tax policies that can help low-income families pay for child care. First, it analyzes recent changes to the Child and Dependent Care Tax Credit (CDCTC), the main child care-focused instrument in the tax code, to determine whether these changes reached more low-income families. Second, it offers two options for increasing the credit's value to low-income families: (1) making the credit refundable so low-income families with no tax liability can receive it; and (2) increasing the credit rate. Third, it considers expanding the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) as an alternative way to help low-income families with children.1