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Women’s Law Center

Dependent Care Tax Credit

Many working families cannot afford the high cost of child and adult dependent care.
The price of child care can range from $4,000 to $10,000 annually per child, depending on the age of the child, the type of care, and geographic location. After housing and food, child care is the largest expense for low- and middle-income families with children between the ages of three and five.1 Expenses for adult care can be even higher—the average cost of adult day care can vary from $25 to $70 per day.2
Targeted tax credits, such as the federal dependent care tax credit (DCTC), help offset the costs of child and adult care for working families.
The federal DCTC allows taxpayers to offset a portion of dependent care expenses against their federal income tax liability. As of 2006, the DCTC provides a maximum of $2,100 for families with incomes under $15,000 and two or more dependents, and $1,200 for families with incomes under $43,000 with two or more dependents. In 2002, over six million taxpayers claimed the DCTC and received almost $2.7 billion in tax relief.3
Twenty-six states offer tax assistance for child and adult care expenses.
Twenty-six states and the District of Columbia offer dependent care tax assistance to families. Most of those states provide a tax credit that is calculated as a percentage of the federal DCTC. Fifteen states have “refundable” credits which target those most in need of assistance. This type of credit allows families to receive a refund if the credit exceeds their total income tax liability. For example, in tax year 2005, New York allowed a maximum refundable credit of $2,310—110 percent of the federal DCTC—to families with incomes under $25,000, and $240 to families with incomes over $65,000. The combination of federal and state dependent care tax credits provides relief to families struggling with the costs of caregiving.
Dependent care tax credits help millions of families who do not benefit from childcare subsidies.
The Child Care and Development Block Grant (CCDBG) provides funds to subsidize the cost of state childcare programs for families with incomes up to 85 percent of the median income. However, due to limited federal funding, only one in seven eligible children actually receives help. In addition, the vast majority of states disqualify families for childcare subsidies before they reach the federal income eligibility limit. Even when CCDBG subsidies are available, the amount of the subsidy is often so low that parents cannot afford the co-payments. Dependent care tax credits—especially if they are refundable—help close these gaps. Tax credits can also provide assistance to moderate-income families that earn too much to qualify for federal childcare subsidies.
Low-income families receive more relief from dependent care tax credits than from tax deductions.
The value of a tax deduction is determined by income level—a deduction is worth more to a high-income family than a low-income family. In contrast, tax credits are worth the same for both higher- and lower-income families.
States can ensure that the greatest tax benefits reach low- and moderate-income families.
  • Tax credits should be fully refundable—Refundability ensures that a state dependent care tax provision provides as much assistance as possible to low-income families. The lowest-income families are likely to have so little state income tax liability that, without a refundable credit, they will derive little or no benefit from a dependent care tax provision.
  • Benefit amounts should be determined by a progressive sliding scale—States can further target dependent care tax benefits to low- and moderate-income families through use of sliding-scale formulas.

This policy summary relies in large part on information from the National Women’s Law Center.

Endnotes
  1. Karen Schulman, “The High Cost of Child Care Puts Quality Care Out of Reach for Many Families,” Children’s Defense Fund, 2000.
  2. Amara Rose, Jeanne Segal and Manika White, “Adult Day Care Centers: A Guide to Options and Selecting the Best Center for Your Needs,” Helpguide.org, 2005.
  3. David Campbell and Michael Paris, “Individual Income Tax Returns, 2002,” Statistics of Income Bulletin, Fall 2004.
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