The Child and Dependent Care Tax Credit (CDCTC) is a tax credit that helps working families pay expenses for the care of children, adult dependents or an incapacitated spouse. Families can claim up to $3,000 in dependent care expenses for one child/dependent and $6,000 for two children/dependents per year. The credit is worth between 20 percent and 35 percent of these expenses, depending on a family’s income. Eligible families with adjusted gross income (AGI) of $15,000 or less can claim 35 percent of these expenses for a maximum potential credit of $2,100. The percentage of expenses a family can claim steadily decreases as income rises, until families with AGI of $43,000 or more reach the minimum claim rate of 20 percent, qualifying for a maximum potential credit of $1,200.
The current CDCTC benefits are a result of an expansion in the 2001 tax cuts that were extended through December 31, 2012 as part of H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
President Obama proposed further expanding the credit in both his 2011 and 2012 budgets to help higher-earning working families cover the rising cost of child care. The 2011 expansion proposal would apply the maximum claim rate of 35 percent to all families with AGI less than $85,000 a year. The credit would then begin to phase-down until it reached 20 percent of eligible expenses for families with AGI of $113,000 or more.1 In his 2012 budget, President Obama proposed extending the 35 percent credit rate to all families earning less than $75,000 a year, and steadily phasing-down the credit until families making $103,000 or more reached the lowest credit rate of 20 percent of care expenses.2 Other expansion proposals include changes such as making the credit refundable, increasing the allowable expense limits and indexing the expense amounts to inflation.3 These types of improvements to the CDCTC would provide greater relief to low- and moderate-income families.
Unlike the Earned Income Tax Credit and the Child Tax Credit, the CDCTC is non-refundable. This means that if a family does not earn enough money to owe federal income taxes, it cannot benefit from the credit. Currently, 24 states have enacted state CDCTCs and of those, 8 are at least partially refundable.
For more information on the federal CDCTC see:
Paying for Child Care? The Child and Dependent Care Credit Could Help, Center on Budget and Policy Priorities, 2010
Quick Facts: Child and Dependent Care Tax Credit (CDCTC), Tax Policy Center, 2010
Taxation and the Family: How Does the Tax System Subsidize Child Care Expenses? Elaine Maag, Tax Policy Center, August 2011
For more information on state CDCTCs see:
Making Care Less Taxing: Improving State Child and Dependent Care Tax Provisions, National Women’s Law Center, April 2011
Making the Grade for Care: Ranking State Child and Dependent Care Tax Provisions, National Women’s Law Center, April 2011
1 Elaine Maag, “Taxation and the Family: How does the tax system subsidize child care expenses?” Tax Policy Center, August 2011
2 General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals, Department of the Treasury, February 2011
3 “An Expanded and Refundable Child and Dependent Care Tax Credit Would Help Make Child Care More Affordable for Millions of Families,” National Women’s Law Center, November 2009