Congressional Research Service

The Child and Dependent Care Credit Congressional Research Service

Some policymakers have shown interest in having the federal government offset some of the costs families incur for child care. The child and dependent care tax credit (CDCTC or "child care credit") reimburses some taxpayers for a portion of their out-of-pocket child care expenses. The CDCTC is a nonrefundable tax credit, meaning taxpayers with little or no income tax liability-including many low-income taxpayers-receive little if any credit. Using the TRIM3 model, this report provides estimates of key characteristics of the CDCTC under current law and estimates the distributional effect of selected policy options that would change the credit. Estimates presented in this report are derived using 2014 calendar year data. Hence, estimates reflect 2014 credit amounts as well as the impact of policy options if implemented in 2014. Analysis of the credit under current law indicates A significant amount of the benefit goes to higher-income taxpayers. An estimated 35% of the tax units claiming the credit were in the highest-income quintile (top 20%) in 2014. In contrast, 1% of all CDCTC recipient families were in the lowest-income quintile in the same year. Over 7 out of 10 CDCTC families were married couple families where both parents worked, with the remaining being single parents who worked. The typical (median) amount and range of spending on child care increased with income among credit recipients. This report estimates the distributional impact of four policy options to modify the CDCTC. Making the credit refundable. Refundability would primarily benefit families in the bottom two income quintiles. Convert the credit into a deduction. Converting the credit to an above-the-line deduction would primarily benefit the top 20% of taxpayers. Some taxpayers in the second-lowest income quintile would receive a smaller benefit in terms of tax savings with a deduction than with a credit. Increasing the credit rate. Increasing the credit rate to a uniform 50% would primarily benefit the top 40% of taxpayers. Increase the maximum amount of expenses. Doubling the amount of allowable expenses that could be applied toward the credit would primarily benefit the top 40% of taxpayers. One major factor driving these estimates is the underlying distribution of out-of-pocket child care expenses. Lower-income families with children tend to have significantly lower out-of-pocket child care expenses than do higher-income taxpayers. Lower out-of-pocket child care expenses do not necessarily mean that lower-income people do not have child care needs; rather, it may indicate that these needs are met informally. In contrast, policy options that increase the amount of allowable expenses, increase the credit rate, or are based on the amount of expenses (like a deduction) will tend to provide the largest benefit to the higher-income taxpayers who have higher child care expenditures to begin with.