Keep Child Care in the Tax Code
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 tax code includes very few provisions or incentives to offset child care expenses, and the tax reform framework released by the White House and Congressional leaders reportedly eliminates the one existing tax credit specifically created to help families with the cost of child care. Learn more about the importance of the Child and Dependent Care Tax Credit.
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 keeping the CDCTC in the code, expanding it, and making it refundable, policymakers have an opportunity to help address working families’ child care needs.
Unfortunately, the “Big Six” tax reform framework proposes, with little detail, a plan to expand the Child Tax Credit (CTC) to an unspecified amount, reportedly eliminating the CDCTC. While we support expanding the CTC, it is not tied to child care, and CTC money may used for any expense—even those not related to the costs of raising a child.
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.
FFYF’s Tax Proposals
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.
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.