Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

Changes from December 7, 2020 to February 1, 2021

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Child and Dependent Care Tax Benefits: ~~How~~
~~December 7, 2020~~
February 1, 2021 How They Work and Who Receives Them
Margot L. Crandall-Hollick
Two tax provisions subsidize the child and dependent care expenses of working parents: the child Two tax provisions subsidize the child and dependent care expenses of working parents: the child
Acting Section Research Acting Section Research
and dependent care tax credit (CDCTC) and the exclusion for employer-sponsored child and and dependent care tax credit (CDCTC) and the exclusion for employer-sponsored child and
Manager Manager
dependent care. dependent care.

Conor F. Boyle
The Child and Dependent Care Credit (CDCTC)
Analyst in Social Policy Analyst in Social Policy
The CDCTC is a nonrefundable tax credit that reduces a taxpayer’s federal income tax liability The CDCTC is a nonrefundable tax credit that reduces a taxpayer’s federal income tax liability

based on child and dependent care expenses incurred by taxpayers who work or are looking for based on child and dependent care expenses incurred by taxpayers who work or are looking for
work. The CDCTC is calculated by multiplying the amount of work. The CDCTC is calculated by multiplying the amount of ~~qu alifying~~qualifying expenses—a maximum expenses—a maximum

of $3,000 if the taxpayer has one qualifying individual, and up to $6,000 if the taxpayer has two of $3,000 if the taxpayer has one qualifying individual, and up to $6,000 if the taxpayer has two
or more qualifying individuals—by the appropriate credit rate. The credit rate varies by the taxpayer’s adjusted gross income or more qualifying individuals—by the appropriate credit rate. The credit rate varies by the taxpayer’s adjusted gross income
(AGI), with a maximum(AGI), with a maximum credit rate of 35% that declines, as AGI increases, to 20% for taxpayers with AGI above $43,000 credit rate of 35% that declines, as AGI increases, to 20% for taxpayers with AGI above $43,000
(see the figure below). Even though the credit formula is more generous toward lower-income taxpayers (due to the higher (see the figure below). Even though the credit formula is more generous toward lower-income taxpayers (due to the higher
credit rate), many lower-income taxpayers receive little or no credit because the credit is nonrefundable, as illustrated in the credit rate), many lower-income taxpayers receive little or no credit because the credit is nonrefundable, as illustrated in the
table on the next page.table on the next page.
Figure 1. Child and Dependent Care Credit Rate and Amount by Income, 2020
Married couple with two qualifying children and $6,000 of qualifying expenses Married couple with two qualifying children and $6,000 of qualifying expenses

Source: The Internal Revenue Code (IRC). For more The Internal Revenue Code (IRC). For more information,information, see see Figure 1.2.
A taxpayer must meet a variety of eligibility criteria in order to claim the CDCTC, including incurring qualifying child and A taxpayer must meet a variety of eligibility criteria in order to claim the CDCTC, including incurring qualifying child and
dependent care expenses for one or more qualifying individuals and having earned income.dependent care expenses for one or more qualifying individuals and having earned income.
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Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

  Qualifying expenses for the CDCTC are generally defined as expenses incurred for the care of a qualifying for the CDCTC are generally defined as expenses incurred for the care of a qualifying
individual so that a taxpayer (and their spouse, if filing jointly) can work or look for work. individual so that a taxpayer (and their spouse, if filing jointly) can work or look for work.
  A qualifying individual for the CDCTC is either (1) the taxpayer’s dependent child under 13 years of age for the CDCTC is either (1) the taxpayer’s dependent child under 13 years of age
for the entire year or (2) the taxpayer’s spouse or dependent who is incapable of caring for themselves. for the entire year or (2) the taxpayer’s spouse or dependent who is incapable of caring for themselves.
  Earned income: A taxpayer must have earned income to claim the credit. For married couples, both A taxpayer must have earned income to claim the credit. For married couples, both
spouses must have earnings unless one is a student or incapable of self-care. spouses must have earnings unless one is a student or incapable of self-care.
CDCTC data indicate several key aspects of this tax benefit. First, middle- and upper-middle-income taxpayers CDCTC data indicate several key aspects of this tax benefit. First, middle- and upper-middle-income taxpayers
claim the majority of tax credit dollars. Second, at most income levels the average credit amount is between $500 claim the majority of tax credit dollars. Second, at most income levels the average credit amount is between $500
and $600. Lower-income taxpayers receive less than the average amount. Third, the credit is used almost exclusively and $600. Lower-income taxpayers receive less than the average amount. Third, the credit is used almost exclusively
for the care of children under 13 years old (as opposed to older dependents). About 12% of taxpayers with children for the care of children under 13 years old (as opposed to older dependents). About 12% of taxpayers with children
claim the CDCTC. This participation rate is significantly lower for lower-income taxpayers. claim the CDCTC. This participation rate is significantly lower for lower-income taxpayers.
Table 1. Distribution of Taxpayers, Credit Dollars,
and Average Credit Amount by Adjusted Gross Income (AGI), 2018
% of All Returns
Adjusted Gross
% of All
Claiming
% of Aggregate
Average Credit
Income (AGI)
Returns
CDCTC
CDCTC Dollars
Amount
$0-under $15K $0-under $15K
21.2% 21.2%
0.3% 0.3%
0.1% 0.1%
$124 $124
$15K-under $25K $15K-under $25K
12.9% 12.9%
5.3% 5.3%
3.1% 3.1%
$347 $347
$25K-under $50K $25K-under $50K
23.7% 23.7%
22.3% 22.3%
23.7% 23.7%
$623 $623
$50K-under $75K $50K-under $75K
14.0% 14.0%
15.2% 15.2%
15.1% 15.1%
$583 $583
$75K-under $100K $75K-under $100K
8.9% 8.9%
13.2% 13.2%
13.8% 13.8%
$613 $613
$100K-under $200K $100K-under $200K
13.8% 13.8%
30.2% 30.2%
31.1% 31.1%
$603 $603
$200K-under $500K $200K-under $500K
4.5% 4.5%
11.6% 11.6%
11.1% 11.1%
$564 $564
$500K+ $500K+
1.1% 1.1%
1.9% 1.9%
2.0% 2.0%
$611 $611
All Taxpayers
100.0%
100.0%
100.0%
$586
Source: IRS Statistics of Income (SOI) 2018, Table 3.3. IRS Statistics of Income (SOI) 2018, Table 3.3.
Exclusion for Employer-Sponsored Child and Dependent Care/Dependent Care FSAs
In addition to the CDCTC, taxpayers can exclude from their income up to $5,000 of employer-sponsored child and dependent In addition to the CDCTC, taxpayers can exclude from their income up to $5,000 of employer-sponsored child and dependent
care benefits. Many taxpayers receive the exclusion in the form of a dependent care flexible spending arrangement (FSA). care benefits. Many taxpayers receive the exclusion in the form of a dependent care flexible spending arrangement (FSA).
Eligibility rules and definitions of the exclusion are virtually identical to those of the credit. However, one major difference Eligibility rules and definitions of the exclusion are virtually identical to those of the credit. However, one major difference
between the exclusion and the CDCTC is that the $5,000 maximumbetween the exclusion and the CDCTC is that the $5,000 maximum for the exclusion applies irrespective of the number of for the exclusion applies irrespective of the number of
qualifying individuals. Taxpayers can claim both the exclusion and the tax credit, but not for the same out-of-pocket child qualifying individuals. Taxpayers can claim both the exclusion and the tax credit, but not for the same out-of-pocket child
and dependent care expenses. In addition, for every dollar of employer-sponsored child and dependent care excluded from and dependent care expenses. In addition, for every dollar of employer-sponsored child and dependent care excluded from
income, the taxpayer must reduce the maximum amount of qualifying expenses claimed for the CDCTC. income, the taxpayer must reduce the maximum amount of qualifying expenses claimed for the CDCTC.
Data from the Bureau of Labor Statistics (BLS) indicate that about 43% of employees have access to a child and dependent Data from the Bureau of Labor Statistics (BLS) indicate that about 43% of employees have access to a child and dependent
care flexible spending account, while 11% have access to other types of employer-sponsored child care. Overall, these data care flexible spending account, while 11% have access to other types of employer-sponsored child care. Overall, these data
indicate that these benefits are more widely available to higher-compensated employees at larger establishments. Data from indicate that these benefits are more widely available to higher-compensated employees at larger establishments. Data from
the IRS based on W-2 information returns, however, suggest actual use of these benefits is relatively low. The most recent the IRS based on W-2 information returns, however, suggest actual use of these benefits is relatively low. The most recent
data available indicate about 1.5 million taxpayers received tax-free employer-sponsored dependent care benefits in 2017. In data available indicate about 1.5 million taxpayers received tax-free employer-sponsored dependent care benefits in 2017. In
comparison, during the same year there were about 153 million returns filed, and 6.5 millioncomparison, during the same year there were about 153 million returns filed, and 6.5 million included the CDCTC. included the CDCTC.
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Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

Introduction
There are two tax provisions that subsidize the child and dependent care expenses of working There are two tax provisions that subsidize the child and dependent care expenses of working
parents: the child and dependent care tax credit (CDCTC) and the exclusion for employer-parents: the child and dependent care tax credit (CDCTC) and the exclusion for employer-
sponsored child and dependent care.1 This report provides a general overview of these two tax sponsored child and dependent care.1 This report provides a general overview of these two tax
benefits, focusing on eligibilitybenefits, focusing on eligibility requirements and benefit calculation. The report also includes requirements and benefit calculation. The report also includes
summary data on these benefits that highlight several characteristics of claimants. summary data on these benefits that highlight several characteristics of claimants.
Child and Dependent Care Tax Credit
The child and dependent care tax credit is a nonrefundable tax credit that reduces a taxpayer’s The child and dependent care tax credit is a nonrefundable tax credit that reduces a taxpayer’s
federal income tax liabilityfederal income tax liability based on child and dependent care expenses incurred so the taxpayer based on child and dependent care expenses incurred so the taxpayer
can work or look for work.2 Since the credit (sometimes referred to as the child care credit or the can work or look for work.2 Since the credit (sometimes referred to as the child care credit or the
CDCTC) is nonrefundable, the amount of the credit cannot exceed a taxpayer’s federal income CDCTC) is nonrefundable, the amount of the credit cannot exceed a taxpayer’s federal income
tax liability.tax liability. Taxpayers with little or no federal income tax liability—includingTaxpayers with little or no federal income tax liability—including many low-income many low-income
taxpayers—taxpayers—~~general y~~generally receive little receive little if any benefit from nonrefundable credits like the CDCTC. if any benefit from nonrefundable credits like the CDCTC.
Eligibility for the Credit
To claim the child and dependent care credit, a taxpayer must meet a variety of eligibilityTo claim the child and dependent care credit, a taxpayer must meet a variety of eligibility criteria. criteria.
The taxpayer must have qualifying expenses for a qualifying individual,The taxpayer must have qualifying expenses for a qualifying individual, have earned income, and have earned income, and
file taxes with an file taxes with an ~~al owable~~allowable filing status. These terms are defined briefly below. filing status. These terms are defined briefly below.
  Qualifying individual: A qualifying individual A qualifying individual for the CDCTC is either (1) the for the CDCTC is either (1) the
taxpayer’s dependent child under 13 years of age, or (2) the taxpayer’s spouse or taxpayer’s dependent child under 13 years of age, or (2) the taxpayer’s spouse or
dependent who is incapable of caring for themself. dependent who is incapable of caring for themself.
  Qualifying expenses: Qualifying expenses are Qualifying expenses are ~~general y~~generally defined as expenses defined as expenses
incurred for the care of a qualifying individual incurred for the care of a qualifying individual so that a taxpayer (and their so that a taxpayer (and their
spouse, if filing jointly) can work or look for work. Payments made to a relative spouse, if filing jointly) can work or look for work. Payments made to a relative
for child and dependent care may be eligiblefor child and dependent care may be eligible for the credit, unless the relative is for the credit, unless the relative is
the taxpayer’s dependent, child under 19 years old, spouse, or the parent of a the taxpayer’s dependent, child under 19 years old, spouse, or the parent of a
qualifying child. Taxpayers claiming the CDCTC qualifying child. Taxpayers claiming the CDCTC ~~general y~~generally must provide the must provide the
name, address, and taxpayer identification number of any person or organization name, address, and taxpayer identification number of any person or organization
that provides care for a qualifying individual.that provides care for a qualifying individual.
  Earned income: A taxpayer must have earned income to claim the credit. The A taxpayer must have earned income to claim the credit. The
amount of qualifying expenses claimed for the credit cannot be greater than the amount of qualifying expenses claimed for the credit cannot be greater than the
taxpayer’s earned income for the year (or the earned income of the lower-earning taxpayer’s earned income for the year (or the earned income of the lower-earning
spouse in the case of married taxpayers). For married couples filing jointly, both spouse in the case of married taxpayers). For married couples filing jointly, both
spouses must have earnings unless one is either a student or incapable of self-spouses must have earnings unless one is either a student or incapable of self-
care.care.
  Taxes filed with an allowable filing status: Taxpayers are Taxpayers are ~~general y~~generally ineligible ineligible
for the CDCTC if they file their taxes as “married filing separately.” for the CDCTC if they file their taxes as “married filing separately.”

~~1 T he~~ 1 The two tax provisions discussed two tax provisions discussed in this report are available to qualifyingin this report are available to qualifying families. families. ~~T here~~There is another tax benefit for is another tax benefit for
child care available to employers under Internal Revenue Code (IRC)child care available to employers under Internal Revenue Code (IRC) §45F, which§45F, which is beyond the scope of this report.is beyond the scope of this report.
2 IRC §21. 2 IRC §21.
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Qualifying Individual
For the purposes of the child and dependent care credit, a qualifying individual For the purposes of the child and dependent care credit, a qualifying individual is a is a
  Young child: The taxpayer’s dependent child under 13 years of age.3 The taxpayer’s dependent child under 13 years of age.3
  Spouse incapable of caring for themselves: The taxpayer’s spouse who is The taxpayer’s spouse who is
~~physical y or mental y~~physically or mentally incapable of self-care and has lived with the taxpayer for incapable of self-care and has lived with the taxpayer for
more than half the year. Incapable of self-care means that the individual cannot more than half the year. Incapable of self-care means that the individual cannot
care for their own hygiene or nutritional needs or requires full-time attention for care for their own hygiene or nutritional needs or requires full-time attention for
their own safety or the safety of others.4 their own safety or the safety of others.4
  Other dependents incapable of caring for themselves: An individual who is An individual who is
~~physical y or mental y~~physically or mentally incapable of self-care (as defined above), lived with the incapable of self-care (as defined above), lived with the
taxpayer for more than half of the year, and is taxpayer for more than half of the year, and is ~~general y~~generally the taxpayer’s the taxpayer’s
dependent.5 Examples of individuals who may dependent.5 Examples of individuals who may ~~fal~~ fall into this category include into this category include
adult children who cannot care for themselves and elderly relatives who live with adult children who cannot care for themselves and elderly relatives who live with
the taxpayer. the taxpayer.
The taxpayer must provide the taxpayer identification number—either a SSN, ITIN, or adoption The taxpayer must provide the taxpayer identification number—either a SSN, ITIN, or adoption
taxpayer identification number (ATIN)—of each qualifying individualtaxpayer identification number (ATIN)—of each qualifying individual for whom they claim the for whom they claim the
CDCTC. Failure to do so can result in the denial of the credit. CDCTC. Failure to do so can result in the denial of the credit.
Qualifying Expenses
Qualifying expenses for the credit are Qualifying expenses for the credit are ~~general y~~generally defined as expenses for the care of a qualifying defined as expenses for the care of a qualifying
individualindividual so that a taxpayer (and their spouse, if filing jointly) can work or look for work.6 An so that a taxpayer (and their spouse, if filing jointly) can work or look for work.6 An
expense is not considered work-related merely because a taxpayer paid or incurred the expense expense is not considered work-related merely because a taxpayer paid or incurred the expense
while working or looking for work. The while working or looking for work. The purpose of the expense must be to enable the taxpayer to of the expense must be to enable the taxpayer to
work or look for work. Whether an expense has such a purpose is dependent on the facts and work or look for work. Whether an expense has such a purpose is dependent on the facts and
circumstances of each particular case. Qualifying expenses may include costs for a qualifying circumstances of each particular case. Qualifying expenses may include costs for a qualifying
individual’s care provided in or outside the taxpayer’s home.individual’s care provided in or outside the taxpayer’s home.
In-home Care Expenses
In-home care expenses include costs of care provided in the taxpayer’s home such as the cost of a In-home care expenses include costs of care provided in the taxpayer’s home such as the cost of a
nanny to look after a child or a housekeeper to look after an elderly parent. The payroll taxes nanny to look after a child or a housekeeper to look after an elderly parent. The payroll taxes
associated with these services, as associated with these services, as ~~wel~~ well as meals and lodging provided to the caregiver as part of as meals and lodging provided to the caregiver as part of
their employment, may be qualifying expenses. For household services that are in part for the their employment, may be qualifying expenses. For household services that are in part for the

~~3 T he~~ 3 The dependent child must be dependent child must be the taxpayer’s “qualifying child” for purposes of claiming the personal exemption with the taxpayer’s “qualifying child” for purposes of claiming the personal exemption with
the additional requirement that the child be 12 years or younger when the qualifyingthe additional requirement that the child be 12 years or younger when the qualifying expenses wereexpenses were paid or incurred.paid or incurred.
For more information on what a “For more information on what a “ qualifying child” isqualifying child” is for the personal exemption, for the personal exemption, see ~~Appe ndix~~see Appendix A. Although the . Although the
personal exemption was effectively suspended from 2018 through 2025, the definition of a “personal exemption was effectively suspended from 2018 through 2025, the definition of a “ qualifying child” for the qualifying child” for the
personal exemption is still in effect. personal exemption is still in effect.
4 26 C.F.R. §1.21-1(b)(4). 4 26 C.F.R. §1.21-1(b)(4).
5 5 ~~T echnically~~Technically, the individual must either be (a) , the individual must either be (a) ~~t he~~the taxpayer’s dependent; or (b) an individual taxpayer’s dependent; or (b) an individual who the taxpayer could who the taxpayer could
have claimed ashave claimed as a dependenta dependent except that (1) the individual has grossexcept that (1) the individual has gross income that equals or exceeds the personal income that equals or exceeds the personal
exemption amount (which wouldexemption amount (which would have been $4,300 in 2021 if personal exemptions were not suspended, according to have been $4,300 in 2021 if personal exemptions were not suspended, according to
the IRS), or (2) the individualthe IRS), or (2) the individual files a joint return, or (3) the individual (or their spouse, if filing jointly) could be files a joint return, or (3) the individual (or their spouse, if filing jointly) could be
claimed asclaimed as a dependent on another taxpayer’s return. a dependent on another taxpayer’s return.
6 For the purposes of the credit, this includes6 For the purposes of the credit, this includes full-time work, part-time work, and self-employment. full-time work, part-time work, and self-employment.
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Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

care of qualifying individuals care of qualifying individuals and in part for other purposes, and in part for other purposes, ~~general y~~generally only the portion for the only the portion for the
care of a qualifying individualcare of a qualifying individual can be used in determining the credit.7 can be used in determining the credit.7
Out-of-home Care Expenses
Several types of care provided outside the taxpayer’s home may be considered qualifying Several types of care provided outside the taxpayer’s home may be considered qualifying
expenses for the purposes of the credit. To qualify, the care must be provided to the taxpayer’s expenses for the purposes of the credit. To qualify, the care must be provided to the taxpayer’s
dependent child under age 13 or another qualifying person who regularly spends at least eight dependent child under age 13 or another qualifying person who regularly spends at least eight
hours each day in the taxpayer’s home (in other words, a nonchild dependent must hours each day in the taxpayer’s home (in other words, a nonchild dependent must ~~general y~~generally live live
with the taxpayer even if that dependent spends the day at a care facility). This means, for with the taxpayer even if that dependent spends the day at a care facility). This means, for
example, that care provided at a live-in nursing home for a taxpayer’s parent or spouse is not a example, that care provided at a live-in nursing home for a taxpayer’s parent or spouse is not a
qualifying expense. Common types of qualifying out-of-home care expenses include the qualifying expense. Common types of qualifying out-of-home care expenses include the
following: following:
  Dependent care center: Care provided at a “dependent care center” can be Care provided at a “dependent care center” can be
considered a qualifying expense only if the center complies with considered a qualifying expense only if the center complies with al all state and state and
local regulations. A dependent care center is defined as a facility that provides local regulations. A dependent care center is defined as a facility that provides
care for more than six people (other than those who may reside at the facility) care for more than six people (other than those who may reside at the facility)
and receives a payment or grant for providing care services.and receives a payment or grant for providing care services.
  Prekindergarten (Pre-K) education/before- and after-school care: Expenses Expenses
for education below the kindergarten level (e.g., nursery school or preschool) for education below the kindergarten level (e.g., nursery school or preschool)
may be qualifying expenses for the credit. Treasury regulations provide that may be qualifying expenses for the credit. Treasury regulations provide that
expenses for education at the kindergarten level or higher do not qualify for the expenses for education at the kindergarten level or higher do not qualify for the
credit, and neither do summer school nor tutoring expenses.8 However, before- or credit, and neither do summer school nor tutoring expenses.8 However, before- or
after-school care of a child in kindergarten or higher grades may be a qualifying after-school care of a child in kindergarten or higher grades may be a qualifying
expense.expense.
  Day camp: Day camp may be a qualifying expense. However, overnight camp is Day camp may be a qualifying expense. However, overnight camp is
not a qualifying expense. not a qualifying expense.
  Transportation: Transportation by a care provider (i.e., not the taxpayer) to take Transportation by a care provider (i.e., not the taxpayer) to take
a qualifying individual a qualifying individual to or from a place where care is provided may be a to or from a place where care is provided may be a
qualifying expense. For example, the cost of a nanny driving a child to a day care qualifying expense. For example, the cost of a nanny driving a child to a day care
center may be considered a qualifying expense.9 center may be considered a qualifying expense.9
~~Table 1. Typical Expenses that May Qualify for the Child and Dependent Care Credit~~
~~Type of Care~~
~~Child~~
~~Other Dependent~~
~~In-Home Care~~

~~Nannies/Housekeepers~~

~~Nannies/Housekeepers~~

~~Au Pairs~~

~~Home health aid~~

~~“Visiting Angels”~~

~~7 T reasury~~ 7 Treasury regulations provide that a taxpayer does not need to allocate expenses between care for a qualifying regulations provide that a taxpayer does not need to allocate expenses between care for a qualifying
individualindividual and other purposes if, for example, other goods and services are provided incidental to and inseparably as and other purposes if, for example, other goods and services are provided incidental to and inseparably as
part of the care (e.g., meals and snacks provided at day care) or if the expense for the other purpose is small. 26 C.F.R. part of the care (e.g., meals and snacks provided at day care) or if the expense for the other purpose is small. 26 C.F.R.
§1.21(d). §1.21(d).
8 26 C.F.R. §1.21(d)(5), (7). 8 26 C.F.R. §1.21(d)(5), (7).
9 According to the Internal Revenue Service, the cost of transportation for a care provider to the taxpayer’s home is 9 According to the Internal Revenue Service, the cost of transportation for a care provider to the taxpayer’s home is ~~n ot~~not
a qualifyinga qualifying expense becauseexpense because the expense is not for the care of a qualifyingthe expense is not for the care of a qualifying person. Seeperson. See Internal Revenue Service, Internal Revenue Service,
Publication 503 Child and Dependent Care Expenses, 2016, p. 7. , 2016, p. 7.
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Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

~~Type of Care~~
~~Child~~
~~Other Dependent~~
Table 2. Typical Expenses that May Qualify for the Child and Dependent Care Credit Type of Care Child Other Dependent In-Home Care  Nannies/Housekeepers  Nannies/Housekeepers  Au Pairs  Home health aid  “Visiting Angels” Outside-the-Home Care Outside-the-Home Care
 
Child care Child care
 
Adult day care Adult day care
 
Nursery school Nursery school
 
Preschool Preschool
 
Before- or after-school care for a child in Before- or after-school care for a child in
kindergarten or higher grade kindergarten or higher grade
 
Day camp (overnight camp is NOT a Day camp (overnight camp is NOT a
qualifying expense) qualifying expense)
Source: CongressionalCongressional Research ServiceResearch Service based on information found in 26 C.F.R.based on information found in 26 C.F.R. §1.21. §1.21.
Note: The expense must meet al other criteria, The expense must meet al other criteria, including being paid or incurred so that the taxpayer can work including being paid or incurred so that the taxpayer can work
or look for work.or look for work. Whether an expense Whether an expense ~~actual y~~actually qualifies for the credit wil qualifies for the credit wil depend on the facts and depend on the facts and
circumstances of each particular case. circumstances of each particular case.
Rules Regarding Payments Made to Relatives Who Provide Care
Payments made to a relative for child and dependent care are Payments made to a relative for child and dependent care are ~~general y~~generally eligible eligible for the credit. for the credit.
However, payments made to the following types of relatives However, payments made to the following types of relatives would not be eligible for the for the
CDCTC.CDCTC.
  Taxpayer’s dependent: The relative is the taxpayer’s dependent.10 The relative is the taxpayer’s dependent.10
  Child under 19 years old: The relative is the taxpayer’s child and under 19 The relative is the taxpayer’s child and under 19
years old (irrespective of whether they are the taxpayer’s dependent). years old (irrespective of whether they are the taxpayer’s dependent).
  Spouse: The relative is the taxpayer’s spouse at any time during the year. The relative is the taxpayer’s spouse at any time during the year.
  Parent of a qualifying child: The relative is the parent of the qualifying child The relative is the parent of the qualifying child
for whom the expenses are incurred.11 for whom the expenses are incurred.11
Care Provider Identification (ID) Test
Taxpayers claiming the CDCTC Taxpayers claiming the CDCTC ~~general y~~generally must provide the name, address, and taxpayer must provide the name, address, and taxpayer
identification number of any individualidentification number of any individual or entity that provides care for a qualifying individual,or entity that provides care for a qualifying individual, or or
the IRS may deny the taxpayer’s claim for the credit. Taxpayer identification numbers for the IRS may deny the taxpayer’s claim for the credit. Taxpayer identification numbers for
individualsindividuals are either Social Security numbers (SSNs) or individual taxpayer identification are either Social Security numbers (SSNs) or individual taxpayer identification
numbers (ITINs). Entities’ taxpayer identification numbers are numbers (ITINs). Entities’ taxpayer identification numbers are ~~general y~~generally employer identification employer identification
numbers (EINs). Taxpayers are only required to provide the name and address (i.e., not the ITIN) numbers (EINs). Taxpayers are only required to provide the name and address (i.e., not the ITIN)
of a care provider that is a tax-exempt 501(c)(3) organization. If a care provider refuses to provide of a care provider that is a tax-exempt 501(c)(3) organization. If a care provider refuses to provide
information (e.g., an individual does not wish to provide the taxpayer with their SSN), the information (e.g., an individual does not wish to provide the taxpayer with their SSN), the
~~taxpayer can general y stil claim the credit if they exercise due diligence in attempting to obtain~~
~~the information and keep a record of their attempt to secure this information.12~~

~~10 T he~~ 10 The taxpayer or spouse is eligible taxpayer or spouse is eligible to claim the relative as a dependent for the personal exemption. to claim the relative as a dependent for the personal exemption. ~~T he~~The personal personal
exemption (IRC §151) and the definition of a dependent eligibleexemption (IRC §151) and the definition of a dependent eligible for the personal exemption (IRC §152) remain in the for the personal exemption (IRC §152) remain in the
current Internal Revenue Code. However, from 2018 through the end of 2025, the personal exemption current Internal Revenue Code. However, from 2018 through the end of 2025, the personal exemption ~~am ount~~amount is zero. is zero.
11 In this case, the qualifying 11 In this case, the qualifying child is definedchild is defined specifically asspecifically as the taxpayer’s dependent child under the age of 13. Congressional Research Service 4 link to page 13 link to page 13 Child and Dependent Care Tax Benefits: How They Work and Who Receives Them taxpayer can generally still claim the credit if they exercise due diligence in attempting to obtain the information and keep a record of their attempt to secure this information.12 ~~the taxpayer’s dependent child under the age of 13.~~
~~12 Generally, a taxpayer will obtain the identifying information from a child and dependent care provider by asking the~~
~~provider to fill out IRS Form W-10. T axpayers then provide the information to the IRS by filling out the Form 2441,~~
~~which is used to claim the credit. According to the IRS, if the care provider refuses to provide a taxpayer identification~~
~~number or other information, the taxpayer should “ Claim the childcare expenses on Form 2441, Child and Dependent~~
~~Care Expenses, and provide the care provider’s information you have available (such as name and address). Write ‘See~~
~~Attached Statement ’ in the columns missing information. Explain on the attached statement that you requested the~~
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Earned Income Test
In order to claim the credit, a taxpayer (and if married, their spouse) must have earned income In order to claim the credit, a taxpayer (and if married, their spouse) must have earned income
during the year. For taxpayers who do not work as a result of the taxpayer (or if married, their during the year. For taxpayers who do not work as a result of the taxpayer (or if married, their
spouse) being incapable of self-care or a full-time student, special rules apply in calculating their spouse) being incapable of self-care or a full-time student, special rules apply in calculating their
annual earned income (see annual earned income (see “Deemed Income in Cases Where an Individual is Incapable of Self-
Care or a Full-Time Student”)). .
Earned income includes wages, salaries, tips, other taxable employee compensation, and net Earned income includes wages, salaries, tips, other taxable employee compensation, and net
earnings from self-employment. In general only earned income that is taxable (i.e., wages, earnings from self-employment. In general only earned income that is taxable (i.e., wages,
salaries, and tip income) is considered for this test. Hence nontaxable compensation like foreign salaries, and tip income) is considered for this test. Hence nontaxable compensation like foreign
earned income and Medicaid waiver payments does not count as earned income. However, earned income and Medicaid waiver payments does not count as earned income. However,
taxpayers can elect to include nontaxable combat pay as earned income when claiming the credit. taxpayers can elect to include nontaxable combat pay as earned income when claiming the credit.
Filing Status
~~General y~~Generally, taxpayers who file their federal income taxes as single, head of household, or married , taxpayers who file their federal income taxes as single, head of household, or married
filing jointlyfiling jointly are eligibleare eligible to claim the credit,13 while those who file using the status “married filing to claim the credit,13 while those who file using the status “married filing
separately” are ineligibleseparately” are ineligible for the credit. However, in certain cases taxpayers who use the filing for the credit. However, in certain cases taxpayers who use the filing
status “married filing separately” may be eligiblestatus “married filing separately” may be eligible for the credit if they live apart from their spouse for the credit if they live apart from their spouse
for more than half the year and care for a qualifying individual.14for more than half the year and care for a qualifying individual.14 (Spouses who are (Spouses who are ~~legal y~~
legally separated are separated are ~~general y~~generally not considered married for tax purposes.) not considered married for tax purposes.)
Calculating the Credit Amount
The amount of the CDCTC is calculated by multiplying the amount of qualifying expenses, after The amount of the CDCTC is calculated by multiplying the amount of qualifying expenses, after
applying the dollar limits and earned income limits (discussed below), by the appropriate credit applying the dollar limits and earned income limits (discussed below), by the appropriate credit
rate. Since the credit is nonrefundable, the actual amount of the credit claimed cannot exceed the rate. Since the credit is nonrefundable, the actual amount of the credit claimed cannot exceed the
taxpayer’s income tax liability.taxpayer’s income tax liability.
The credit rate used to calculate the credit is based on the taxpayer’s adjusted gross income The credit rate used to calculate the credit is based on the taxpayer’s adjusted gross income
(AGI).15 The credit rate is set at a maximum of 35% for taxpayers with AGI under $15,000. The (AGI).15 The credit rate is set at a maximum of 35% for taxpayers with AGI under $15,000. The
~~credit rate then declines by one percentage point for each $2,000 (or fraction thereof) above~~
~~$15,000 of AGI, until the credit rate reaches its statutory minimum of 20% for taxpayers with~~
~~AGI over $43,000. This credit rate schedule is il ustrated in Table 2. The AGI brackets associated~~
~~with each credit rate are not adjusted annual y for inflation and have been unchanged since 2001~~
~~(when they were last changed by legislation).~~

~~provider’s identifying number, but the provider did not give it to you. T his statement supports use of due diligence~~ 12 Generally, a taxpayer will obtain the identifying information from a child and dependent care provider by asking the provider to fill out IRS Form W-10. Taxpayers then provide the information to the IRS by filling out the Form 2441, which is used to claim the credit. According to the IRS, if the care provider refuses to provide a taxpayer identification number or other information, the taxpayer should “Claim the childcare expenses on Form 2441, Child and Dependent Care Expenses, and provide the care provider’s information you have available (such as name and address). Write ‘See Attached Statement’ in the columns missing information. Explain on the attached statement that you requested the provider’s identifying number, but the provider did not give it to you. This statement supports use of due diligence in in
trying to secure the identifying information for the claim.” Internal Revenue Service, trying to secure the identifying information for the claim.” Internal Revenue Service, Tax Products IRS Tax map 2016, ,
ChildcareChildcare Credit, Other Credits - Child and Dependent Care Credit & Flexible Benefit Plans, https://taxmap.ntis.gov/Credit, Other Credits - Child and Dependent Care Credit & Flexible Benefit Plans, https://taxmap.ntis.gov/
taxmap/faqs/faq_07-001.htm#TXMP220d2ed0. taxmap/faqs/faq_07-001.htm#TXMP220d2ed0.
13 A qualifying13 A qualifying widow(er)widow(er) with a dependent child iswith a dependent child is also an eligiblealso an eligible filing status to claim the credit. filing status to claim the credit.
14 Specifically, a married individual14 Specifically, a married individual living apart from their spouse may beliving apart from their spouse may be ~~eligible~~ eligible for the credit if for the credit if ~~th ey~~they fulfill the fulfill the
followingfollowing requirements: (1) file a separate return from their spouse; (2) have a qualifyingrequirements: (1) file a separate return from their spouse; (2) have a qualifying ~~individual~~ individual (for the purposes (for the purposes
of the credit) who lives with them for more than half the year in their home; (3) pay more than half the cost of of the credit) who lives with them for more than half the year in their home; (3) pay more than half the cost of
maintaining their home for the year; (4) and their spouse doesmaintaining their home for the year; (4) and their spouse does not live with them in their home for the last six months not live with them in their home for the last six months
of the year. of the year.
15 Adjusted15 Adjusted ~~gross~~ gross income, as defined in IRC §62. For more information, see CRSincome, as defined in IRC §62. For more information, see CRS Report RL30110, Report RL30110, Federal Individual
~~Incom e Tax Term s~~Income Tax Terms: An Explanation, by Mark P. Keightley. , by Mark P. Keightley.
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~~Table 2~~credit rate then declines by one percentage point for each $2,000 (or fraction thereof) above $15,000 of AGI, until the credit rate reaches its statutory minimum of 20% for taxpayers with AGI over $43,000. This credit rate schedule is illustrated in Table 3. The AGI brackets associated with each credit rate are not adjusted annually for inflation and have been unchanged since 2001 (when they were last changed by legislation). Table 3. Credit Rate and Maximum Credit Amount
By Adjusted Gross Income (AGI) By Adjusted Gross Income (AGI)

Maximum Statutory ~~Credit~~ Credit Amount
Adjusted Gross
Two or More
Income (AGI)
One Child
Children
( > - ≤) ( > - ≤)
Credit Rate
($3,000 max expenses) ($6,000 max expenses)
$0-$15,000 $0-$15,000
35% 35%
$1,050 $1,050
$2,100 $2,100
$15,000 - $17,000 $15,000 - $17,000
34% 34%
$1,020 $1,020
$2,040 $2,040
$17,000 - $19,000 $17,000 - $19,000
33% 33%
$990 $990
$1,980 $1,980
$19,000 - $21,000 $19,000 - $21,000
32% 32%
$960 $960
$1,920 $1,920
$21,000 - $23,000 $21,000 - $23,000
31% 31%
$930 $930
$1,860 $1,860
$23,000 - $25,000 $23,000 - $25,000
30% 30%
$900 $900
$1,800 $1,800
$25,000 - $27.000 $25,000 - $27.000
29% 29%
$870 $870
$1,740 $1,740
$27,000 - $29,000 $27,000 - $29,000
28% 28%
$840 $840
$1,680 $1,680
$29,000 - $31,000 $29,000 - $31,000
27% 27%
$810 $810
$1,620 $1,620
$31,000 - $33,000 $31,000 - $33,000
26% 26%
$780 $780
$1,560 $1,560
$33,000 - $35,000 $33,000 - $35,000
25% 25%
$750 $750
$1,500 $1,500
$35,000 - $37,000 $35,000 - $37,000
24% 24%
$720 $720
$1,440 $1,440
$37,000 - $39,000 $37,000 - $39,000
23% 23%
$690 $690
$1,380 $1,380
$39,000 - $41,000 $39,000 - $41,000
22% 22%
$660 $660
$1,320 $1,320
$41,000 - $43,000 $41,000 - $43,000
21% 21%
$630 $630
$1,260 $1,260
$43,000+ $43,000+
20% 20%
$600 $600
$1,200 $1,200
Source: IRS Publication 503 and Internal Revenue Code (IRC) §21. IRS Publication 503 and Internal Revenue Code (IRC) §21.
Note: None of the parameters None of the parameters of the child and dependent care tax credit are adjusted for inflation. of the child and dependent care tax credit are adjusted for inflation.
The maximum amount of expenses that can be multiplied by the credit rate is $3,000 if the The maximum amount of expenses that can be multiplied by the credit rate is $3,000 if the
taxpayer has one qualifying individualtaxpayer has one qualifying individual and $6,000 if the taxpayer has two or more qualifying and $6,000 if the taxpayer has two or more qualifying
individuals. These amounts are not adjusted individuals. These amounts are not adjusted ~~annual y~~annually for inflation, and have not changed since for inflation, and have not changed since
2001 (when they were last changed by legislation). For taxpayers with two or more qualifying 2001 (when they were last changed by legislation). For taxpayers with two or more qualifying
individuals, the maximum expense threshold is per taxpayer irrespective of actual child and individuals, the maximum expense threshold is per taxpayer irrespective of actual child and
dependent care expenses associated with each qualifying individual. Hence, if a taxpayer has two dependent care expenses associated with each qualifying individual. Hence, if a taxpayer has two
qualifying individuals, and they have incurred no qualifying expenses for one individual and qualifying individuals, and they have incurred no qualifying expenses for one individual and
$6,000 for the other, they can claim a credit based on up to $6,000 of qualifying expenses. $6,000 for the other, they can claim a credit based on up to $6,000 of qualifying expenses.
Even though the credit formula—due to the higher credit rate—is more generous toward lower- Even though the credit formula—due to the higher credit rate—is more generous toward lower-
income taxpayers, many lower-income taxpayers receive little or no credit since the credit is income taxpayers, many lower-income taxpayers receive little or no credit since the credit is
nonrefundable, as nonrefundable, as ~~il ustrated~~illustrated i in Figure 12.
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Figure 12. Child and Dependent Care Credit Rate and Amount, by Income Level
Married couple with two qualifying children and $6,000 of qualifying expenses Married couple with two qualifying children and $6,000 of qualifying expenses

Source: CRS calculations based on Internal Revenue Code (IRC) §21. CRS calculations based on Internal Revenue Code (IRC) §21.
Notes: This is a stylized example of a married This is a stylized example of a married couple filing jointly in 2020. It assumescouple filing jointly in 2020. It assumes that the couple claimsthat the couple claims the the
standard deduction and no other tax benefits. It also assumes the couple has $6,000 of qualifying dependent care standard deduction and no other tax benefits. It also assumes the couple has $6,000 of qualifying dependent care
expenses. expenses. Al All income is assumed to be fromincome is assumed to be from earned income,earned income, and earned income is assumed to equal adjusted and earned income is assumed to equal adjusted
gross incomegross income (AGI). (AGI).
Limitations Based on Earned Income
There are limits on the amount of annual work-related expenses that can be used to calculate the There are limits on the amount of annual work-related expenses that can be used to calculate the
credit, in additioncredit, in addition to the maximum dollar amount of qualifying expenses limit that was previously to the maximum dollar amount of qualifying expenses limit that was previously
discussed. discussed. ~~Specifical y~~Specifically, qualifying expenses used to claim the credit cannot be more than , qualifying expenses used to claim the credit cannot be more than
 the taxpayer’s earned income for the year (for unmarried taxpayers) or  the taxpayer’s earned income for the year (for unmarried taxpayers) or
 the lower-earning spouse’s earned income for the year (for married taxpayers).  the lower-earning spouse’s earned income for the year (for married taxpayers).
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For example, if an unmarried taxpayer had two qualifying individuals For example, if an unmarried taxpayer had two qualifying individuals and $6,000 of qualifying and $6,000 of qualifying
expenses but $4,000 of earned income, the maximum amount of expenses that could be applied expenses but $4,000 of earned income, the maximum amount of expenses that could be applied
toward the credit would be $4,000. toward the credit would be $4,000.
If an individual If an individual (either an unmarried taxpayer or each spouse among married taxpayers) does not (either an unmarried taxpayer or each spouse among married taxpayers) does not
have earnings have earnings for each month of a calendar year, they can calculate their total earned income for , they can calculate their total earned income for
the year by summing up their earnings for those months in which they do have earned income. the year by summing up their earnings for those months in which they do have earned income.
(Among married taxpayers, both spouses may need to calculate their earned income for the year (Among married taxpayers, both spouses may need to calculate their earned income for the year
to determine which spouse is the lower-earning spouse. Total expenses cannot be more than the to determine which spouse is the lower-earning spouse. Total expenses cannot be more than the
earned income of the earned income of the lower-earning spouse.) For example, if an unmarried taxpayer (or the ) For example, if an unmarried taxpayer (or the
lower-earning spouse of a two-earner couple) earned $500 for three months of the year, and did lower-earning spouse of a two-earner couple) earned $500 for three months of the year, and did
not work the remaining nine months of the year, their earned income for the purposes of the not work the remaining nine months of the year, their earned income for the purposes of the
earned income limitationearned income limitation would be $1,500 and they could not use more than $1,500 of child and would be $1,500 and they could not use more than $1,500 of child and
dependent care when calculating the credit. dependent care when calculating the credit.
Deemed Income in Cases Where an Individual is Incapable of Self-Care or a Full-
Time Student
If an individualIf an individual (either an unmarried taxpayer or one spouse among married taxpayers) has little (either an unmarried taxpayer or one spouse among married taxpayers) has little
or no earnings or no earnings for each month of a calendar year because they are incapable of self-care or are a because they are incapable of self-care or are a
full-time student, they full-time student, they ~~wil~~ will calculate their earned income differently. For months in calculate their earned income differently. For months in ~~w hich~~which an an
individualindividual does not have earnings and is also incapable of self-care or a full-time student, their and is also incapable of self-care or a full-time student, their
earned income for that month equals a “deemed” amount (instead of equaling zero). earned income for that month equals a “deemed” amount (instead of equaling zero). ~~Specifical y~~Specifically, ,
their earned income is “deemed” to be $250 per month if they have one qualifying individualtheir earned income is “deemed” to be $250 per month if they have one qualifying individual or or
$500 per month if they have two or more qualifying individuals.16 If an individual—either$500 per month if they have two or more qualifying individuals.16 If an individual—either an an
unmarried taxpayer, or if married, the lower-earning spouse of a two-earner couple—is either a unmarried taxpayer, or if married, the lower-earning spouse of a two-earner couple—is either a
full-time student or not able to care for themselves full-time student or not able to care for themselves for the entire year, they may be eligible , they may be eligible
(depending on their actual expenses) to apply the maximum amount of expenses when calculating (depending on their actual expenses) to apply the maximum amount of expenses when calculating
the credit. the credit. ~~Specifical y~~Specifically, $250 and $500 multiplied, $250 and $500 multiplied by 12 months by 12 months ~~wil~~ will result in an annual amount of result in an annual amount of
earned income of $3,000 if they have one qualifying individualearned income of $3,000 if they have one qualifying individual or $6,000 if they have two or or $6,000 if they have two or
more qualifying individuals—the statutory maximum amount of qualifying expenses for the more qualifying individuals—the statutory maximum amount of qualifying expenses for the
credit.credit.
For married couples, only one spouse in any given month can be “deemed” to have earned For married couples, only one spouse in any given month can be “deemed” to have earned
income ($250 per month for one qualifying individualincome ($250 per month for one qualifying individual or $500 per month for two or more or $500 per month for two or more
qualifying individuals) as a result of being incapable of self-care or being a full-time student. This qualifying individuals) as a result of being incapable of self-care or being a full-time student. This
implies that if implies that if both spouses are incapable of self-care or full-time students simultaneously for spouses are incapable of self-care or full-time students simultaneously for
every month in a year, the couple month in a year, the couple ~~wil~~ will ultimately be ineligibleultimately be ineligible for the credit. In this scenario only for the credit. In this scenario only
one spouse would be considered as having earned income, and hence the couple would be one spouse would be considered as having earned income, and hence the couple would be
~~ineligible~~ ineligible for the credit. for the credit.

16 For example, if an unmarried taxpayer earned $500 for three months of the year, and did not work the remaining nine 16 For example, if an unmarried taxpayer earned $500 for three months of the year, and did not work the remaining nine
months of the year because they were a full-time student and they had one qualifyingmonths of the year because they were a full-time student and they had one qualifying individual,individual, their earned income their earned income
for the purposes of the earned income limitation would befor the purposes of the earned income limitation would be $1,500 ($500 x three months) plus $2,250 ($250 x nine $1,500 ($500 x three months) plus $2,250 ($250 x nine
months) which equalsmonths) which equals $3,750. Since this is more than the statutory $3,750. Since this is more than the statutory ~~maxim um~~maximum of $3,000 per one qualifying individual, of $3,000 per one qualifying individual,
the maximum amount of $3,000 is applicable. the maximum amount of $3,000 is applicable.
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Exclusion for Employer-Sponsored Child and
Dependent Care Benefits
In addition to the CDCTC, workers can exclude from their wages up to $5,000 of employer-In addition to the CDCTC, workers can exclude from their wages up to $5,000 of employer-
sponsored child and dependent care benefits.17 Since the value of these benefits is excluded from sponsored child and dependent care benefits.17 Since the value of these benefits is excluded from
wages, it is not subject to income or payroll taxes. As a result of the exclusion, workers owe less wages, it is not subject to income or payroll taxes. As a result of the exclusion, workers owe less
in income and payroll taxes. For example, a worker subject to a 22% income tax rate (and 7.65% in income and payroll taxes. For example, a worker subject to a 22% income tax rate (and 7.65%
payroll tax rate) who has $1,000 of employer-sponsored dependent care expenses would save payroll tax rate) who has $1,000 of employer-sponsored dependent care expenses would save
$296.50 in federal taxes from the exclusion rather than paying out of pocket (i.e., with after-tax $296.50 in federal taxes from the exclusion rather than paying out of pocket (i.e., with after-tax
dollars).18 dollars).18
The exclusion of employer-sponsored care uses similar definitions and eligibility The exclusion of employer-sponsored care uses similar definitions and eligibility rules as the rules as the
CDCTC. However, one key difference is that when a worker uses the exclusion, the $5,000 CDCTC. However, one key difference is that when a worker uses the exclusion, the $5,000
maximum applies irrespective of the number of qualifying individuals. For example, a family maximum applies irrespective of the number of qualifying individuals. For example, a family
with one qualifying child and a family with two qualifying children with one qualifying child and a family with two qualifying children ~~c ould~~could both use the exclusion both use the exclusion
to set aside up to $5,000 on a pretax basis for child care. With the child and dependent care credit, to set aside up to $5,000 on a pretax basis for child care. With the child and dependent care credit,
there are separate limits based on the number of qualifying individuals ($3,000 for one qualifying there are separate limits based on the number of qualifying individuals ($3,000 for one qualifying
individual,individual, $6,000 for two or more qualifying individuals).19 In addition, married taxpayers who $6,000 for two or more qualifying individuals).19 In addition, married taxpayers who
file their returns as married filing separately are eligiblefile their returns as married filing separately are eligible to benefit from this exclusion, whereas to benefit from this exclusion, whereas
these married separate filers are ineligiblethese married separate filers are ineligible for the CDCTC. for the CDCTC.
Employer-sponsored child and dependent care benefits can be provided in various forms, Employer-sponsored child and dependent care benefits can be provided in various forms,
including including
 direct payments by an employer to a child care or adult day care provider,  direct payments by an employer to a child care or adult day care provider,
 on-site child or dependent care offered by an employer,  on-site child or dependent care offered by an employer,
 employer reimbursement of employee child care costs, and  employer reimbursement of employee child care costs, and
 flexible spending arrangements (FSAs) that  flexible spending arrangements (FSAs) that ~~al ow~~allow employees to set aside a employees to set aside a
portion of their salary on a pretax basis (i.e., under a “cafeteria plan”) to be used portion of their salary on a pretax basis (i.e., under a “cafeteria plan”) to be used
for qualifying child and dependent care expenses. for qualifying child and dependent care expenses.
Survey data from the Bureau of Labor Statistics suggest that dependent care FSAs are Survey data from the Bureau of Labor Statistics suggest that dependent care FSAs are
more frequently offered to workers than are other forms of employer-sponsored more frequently offered to workers than are other forms of employer-sponsored
dependent care (comparable IRS data are not available).20 dependent care (comparable IRS data are not available).20
Dependent Care Flexible Spending Arrangements
Dependent care FSAs must meet the requirements of Dependent care FSAs must meet the requirements of both Internal Revenue Code (IRC) Section Internal Revenue Code (IRC) Section
129, which governs employer-sponsored dependent care benefits broadly, and IRC Section 125, 129, which governs employer-sponsored dependent care benefits broadly, and IRC Section 125,
which governs cafeteria plans. As with most other benefits offered as part of a cafeteria plan, which governs cafeteria plans. As with most other benefits offered as part of a cafeteria plan,
~~workers typical y determine the amount they wish to contribute to a dependent care FSA at the~~
~~beginning of a plan year. Plan years are usual y annual periods during which workers may~~

17 IRC §129. Among other criteria, employer-sponsored child and dependent care must be provided under a written 17 IRC §129. Among other criteria, employer-sponsored child and dependent care must be provided under a written
plan which meets certain conditions. plan which meets certain conditions.
18 18 ~~T his~~This total includes $220 in federal income taxes and $76.50 in Social Security and Medicare payroll taxes. total includes $220 in federal income taxes and $76.50 in Social Security and Medicare payroll taxes.
19 IRC §21(c). 19 IRC §21(c).
20 Bureau20 Bureau of Labor Statistics, of Labor Statistics, National Compensation Survey: Employee Benefits in the United States, March 2019, , March 2019,
~~T ables~~Tables 39 and 40. For purposes of this survey, employer-sponsored child care is 39 and 40. For purposes of this survey, employer-sponsored child care is defined as a workplace program that defined as a workplace program that
“provides for either the full or partial cost of caring for an employee’s children in a nursery, day care center, or a baby “provides for either the full or partial cost of caring for an employee’s children in a nursery, day care center, or a baby
sitter in facilities either on or off the employer’s premises.” sitter in facilities either on or off the employer’s premises.”
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workers typically determine the amount they wish to contribute to a dependent care FSA at the beginning of a plan year. Plan years are usually annual periods during which workers may contribute to and be reimbursed from an FSA. Once a worker has set the amount they wish to contribute to and be reimbursed from an FSA. Once a worker has set the amount they wish to
contribute to an FSA for a plan year, changes are contribute to an FSA for a plan year, changes are ~~al owed~~allowed only in limited circumstances (like the only in limited circumstances (like the
birth of a child or marriage). birth of a child or marriage).
Dependent care FSA contributions are subject to a “use Dependent care FSA contributions are subject to a “use~~-or-~~ or lose” rule, whereby workers forfeit lose” rule, whereby workers forfeit
any unused contributions remaining in their FSA at the end of the plan year. The “useany unused contributions remaining in their FSA at the end of the plan year. The “use~~-or-~~ or lose” lose”
rule ensures that workers cannot use an FSA to defer compensation (and the taxes paid on that rule ensures that workers cannot use an FSA to defer compensation (and the taxes paid on that
compensation) to a future date, which is compensation) to a future date, which is ~~general y~~generally prohibited under IRC Section 125. prohibited under IRC Section 125.
21 Interaction Between the CDCTC and Exclusion for Employer-
Sponsored Child and Dependent Care
Taxpayers can claim both the exclusion and the tax credit, but not for the same out-of-pocket Taxpayers can claim both the exclusion and the tax credit, but not for the same out-of-pocket
child and dependent care expenses. For every pretax (i.e., excluded) dollar of employer-sponsored child and dependent care expenses. For every pretax (i.e., excluded) dollar of employer-sponsored
child and dependent care, the taxpayer must reduce the maximum amount of qualifying expenses child and dependent care, the taxpayer must reduce the maximum amount of qualifying expenses
for the CDCTC (up to $3,000 for one child, $6,000 for two or more children). For example, if a for the CDCTC (up to $3,000 for one child, $6,000 for two or more children). For example, if a
family had one child, $10,000 in annual child care expenses, and contributed $5,000 family had one child, $10,000 in annual child care expenses, and contributed $5,000 ~~annual y~~annually to a to a
dependent care FSA, the family could not claim the CDCTC.dependent care FSA, the family could not claim the CDCTC.2122 The amount of pretax dollars in The amount of pretax dollars in
the FSA ($5,000) would eliminate the maximum amount of expenses that could be applied to the the FSA ($5,000) would eliminate the maximum amount of expenses that could be applied to the
credit ($3,000). If in the same year, the family had a second child, and credit ($3,000). If in the same year, the family had a second child, and al all else remained the same, else remained the same,
they could claim $5,000 tax-free through their FSA and claim the remaining they could claim $5,000 tax-free through their FSA and claim the remaining ~~al owable~~allowable expense of expense of
$1,000 ($6,000 maximum for two or more children, minus $5,000 in the FSA) for the CDCTC. $1,000 ($6,000 maximum for two or more children, minus $5,000 in the FSA) for the CDCTC.

~~21 Employer-sponsored child and dependent care must be provided under~~ 21 In response to the COVID-19 pandemic, Congress provided additional temporary flexibilities for dependent care FSAs as part of P.L. 116-260. Specifically, the law allows employers to permit unused funds in 2020 and 2021 (i.e., FSAs with 2020 and 2021 “plan years”) to be carried over to the next year (i.e., unused funds in a 2020 dependent care FSA could be carried over to 2021 and unused funds from 2021 could be carried over to 2022). The law also allows employers that provide a grace period for using unused funds to extend such grace period in 2020 and 2021 from 2.5 to 12 months (i.e., if there are unused balances in a plan that ends in 2020 or 2021, they can be used for up to 12 additional months after the end of the plan year). In addition, P.L. 116-260 provides special age rules for dependent care FSA coverage of otherwise qualifying children who exceeded the current age limit (under 13 years old) during the pandemic. Finally, the law allows employers to provide employees with the opportunity to make midyear, prospective FSA contribution changes for plans ending in 2021. 22 Employer-sponsored child and dependent care must be provided under a written plan which meets certain conditions. a written plan which meets certain conditions.
Note that under a cafeteria plan, employees have the choice not to accept the exclusion, and hence could apply Note that under a cafeteria plan, employees have the choice not to accept the exclusion, and hence could apply
additional child and dependent care expenses toward the credit. However, in practice, most taxpayers will receive a additional child and dependent care expenses toward the credit. However, in practice, most taxpayers will receive a
greater marginal benefit from the exclusion than the credit. For example, if a taxpayer has $100,000 of adjusted gross greater marginal benefit from the exclusion than the credit. For example, if a taxpayer has $100,000 of adjusted gross
income (AGI) and isincome (AGI) and is subject to a marginal income tax rate of 25% and 7.65% of payroll taxes, they wouldsubject to a marginal income tax rate of 25% and 7.65% of payroll taxes, they would ~~reduce~~ reduce their their
tax bill by 32.65 (25+7.65) cents for every dollar put in the FSA. In comparison, the credit wouldtax bill by 32.65 (25+7.65) cents for every dollar put in the FSA. In comparison, the credit would lower their tax bill by lower their tax bill by
20 cents for every dollar applied toward the credit. 20 cents for every dollar applied toward the credit.
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A Brief Overview of Major Legislative Changes to Child and Dependent Care Tax
Benefits
1976: P.L.: P.L. 94-455 enacted the nonrefundable child and dependent care credit.94-455 enacted the nonrefundable child and dependent care credit.22 23 The credit formula was 20% of The credit formula was 20% of
eligibleeligible expenditures subject to a maximumexpenditures subject to a maximum level of expenditures of $2,000 for one qualifying individual and $4,000 level of expenditures of $2,000 for one qualifying individual and $4,000
for two or more qualifying individuals. These amounts werefor two or more qualifying individuals. These amounts were not adjusted for inflation. not adjusted for inflation.
1981: P.L. 97-34 created the current “sliding-scale” P.L. 97-34 created the current “sliding-scale” credit rate whereby the credit rate decreasescredit rate whereby the credit rate decreases as income as income
increases.increases. The sliding scale began at 30% for taxpayers with adjusted gross income of $10,000 or less,The sliding scale began at 30% for taxpayers with adjusted gross income of $10,000 or less, with the with the
rate reduced by one percentage point for each $2,000 (or fraction thereof) above $10,000 until the lowestrate reduced by one percentage point for each $2,000 (or fraction thereof) above $10,000 until the lowest rate of rate of
20% was reached at $28,000 of income.20% was reached at $28,000 of income. The law also increased the maximum expenditures from $2,000 to $2,400 The law also increased the maximum expenditures from $2,000 to $2,400
for one qualifying individual and fromfor one qualifying individual and from $4,000 to $4,800 for two or more$4,000 to $4,800 for two or more qualifying individuals.qualifying individuals.23 24 The law also The law also
enacted the exclusion for employer-sponsoredenacted the exclusion for employer-sponsored child and dependent care.child and dependent care.
1986: P.L. 99-514 limited the dol ar amount of the exclusion to $5,000 per taxpayer. P.L. 99-514 limited the dol ar amount of the exclusion to $5,000 per taxpayer.
1988: P.L. 100-485 created a dol ar-for-dol ar P.L. 100-485 created a dol ar-for-dol ar reduction in the amount of expenses eligiblereduction in the amount of expenses eligible for the CDCTC for for the CDCTC for
amounts excluded under an employer-sponsoredamounts excluded under an employer-sponsored dependent care assistance programdependent care assistance program (see(see “Interaction Between
the CDCTC and Exclusion for Employer-Sponsored Child and Dependent Care”). .
2001: P.L. 107-16 modified the sliding scale credit rate. The top credit rate was increased from 30% to 35% and P.L. 107-16 modified the sliding scale credit rate. The top credit rate was increased from 30% to 35% and
the income levelthe income level for this credit rate was increased from $10,000 to $15,000. The law also increased the maximum for this credit rate was increased from $10,000 to $15,000. The law also increased the maximum
expenditures from $2,400 to $3,000 for one qualifying individual and from $4,800 to $6,000 for two or more expenditures from $2,400 to $3,000 for one qualifying individual and from $4,800 to $6,000 for two or more
qualifying individuals. These amounts were not indexed for inflation. These werequalifying individuals. These amounts were not indexed for inflation. These were temporary changes scheduled to temporary changes scheduled to
expire at the end of 2010. expire at the end of 2010.
2010: P.L. 111-312 extended the 2001 changes for 2011 and 2012. P.L. 111-312 extended the 2001 changes for 2011 and 2012.
2012: P.L. 112-240 made the 2001 changes permanent. P.L. 112-240 made the 2001 changes permanent.
Data on the CDCTC
The aggregate data for the child and dependent care credit The aggregate data for the child and dependent care credit ~~il ustrate~~illustrate several key aspects of this tax several key aspects of this tax
benefit. benefit.
  Income level of CDCTC claimants: Middle- and upper-middle-income Middle- and upper-middle-income
taxpayers claim the majority of tax credit dollars. taxpayers claim the majority of tax credit dollars.
  Average credit amount: At most income levels the average credit amount is At most income levels the average credit amount is
between $500 and $600. Lower-income taxpayers receive less than the average between $500 and $600. Lower-income taxpayers receive less than the average
amount. amount.
  Average credit amount over time: Over the past 30 years, the average real (i.e., Over the past 30 years, the average real (i.e.,
adjusted for inflation) credit amount per taxpayer has steadily declined and lost adjusted for inflation) credit amount per taxpayer has steadily declined and lost
about one-third of its value. about one-third of its value.
  Types of qualifying individuals claimed for the credit: While the credit is While the credit is
available available for the care expenses of nonchild dependents (disabled family members for the care expenses of nonchild dependents (disabled family members
or elderly parents), the credit is used almost exclusively for the care of children or elderly parents), the credit is used almost exclusively for the care of children
under 13 years old. under 13 years old.
  Percentage of taxpayers with children that claim the CDCTC: While the While the
credit is claimed almost exclusively for the care of children, on average 12% of credit is claimed almost exclusively for the care of children, on average 12% of

22 23 Before the enactment of the child and dependent care credit, “taxpayers could claim as an itemized deduction Before the enactment of the child and dependent care credit, “taxpayers could claim as an itemized deduction certain certain
expenses incurredexpenses incurred for the care of a child or a disabledfor the care of a child or a disabled dependent or spouse up to $4,800 a year. dependent or spouse up to $4,800 a year. ~~T he~~The maximum maximum
deduction wasdeduction was ~~reduced~~ reduced by one dollar for every two dollarsby one dollar for every two dollars of income in excess of $35,000.” Joint Committee on of income in excess of $35,000.” Joint Committee on
~~T axation~~Taxation, , Tax Legislation Enacted in the 94th Congress, October 1976, JCS-31-76, pp. 123-124. This itemized , October 1976, JCS-31-76, pp. 123-124. This itemized
deduction wasdeduction was originally enacted in 1954. P.L. 94-455 converted the deduction to a credit. originally enacted in 1954. P.L. 94-455 converted the deduction to a credit.
23 24 Joint Committee on Joint Committee on ~~T axation~~Taxation, , General Explanation of the Economic Recovery Act if 1981, December 31, 1981, JCS-December 31, 1981, JCS-
71-81. 71-81.
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taxpayers with children claim the credit. This participation rate is significantly taxpayers with children claim the credit. This participation rate is significantly
lower for lower-income taxpayers.lower for lower-income taxpayers.
Income Level of CDCTC Claimants and Average Credit Amount
The CDCTC tends to be claimed by middle- and upper-middle-income taxpayers. Comparatively The CDCTC tends to be claimed by middle- and upper-middle-income taxpayers. Comparatively
few claimants are low-income or very high-income, as few claimants are low-income or very high-income, as ~~il ustrated~~illustrated i in Table 3. ~~For~~4. For most taxpayers, most taxpayers,
the average credit amount is between $500 and $600, although low-income taxpayers that do the average credit amount is between $500 and $600, although low-income taxpayers that do
claim the CDCTC tend to receive a claim the CDCTC tend to receive a ~~smal er~~smaller tax credit. Few lower-income taxpayers benefit from tax credit. Few lower-income taxpayers benefit from
the CDCTC, since the credit is nonrefundable. As previously discussed, a nonrefundable credit is the CDCTC, since the credit is nonrefundable. As previously discussed, a nonrefundable credit is
limited to the taxpayer’s income tax liability. Hence, taxpayers with little to no income tax limited to the taxpayer’s income tax liability. Hence, taxpayers with little to no income tax
liability—includingliability—including low-income taxpayers—receive little to no benefit from nonrefundable low-income taxpayers—receive little to no benefit from nonrefundable
credits like the CDCTC. credits like the CDCTC.
For some taxpayers, For some taxpayers, ~~especial y~~especially higher-income taxpayers, the amount of their CDCTC higher-income taxpayers, the amount of their CDCTC ~~wil~~ will be be
affected by the amount of tax-free employer-sponsored child care they receive. If a taxpayer’s affected by the amount of tax-free employer-sponsored child care they receive. If a taxpayer’s
marginal tax rate is greater than the applicable credit rate, the taxpayer marginal tax rate is greater than the applicable credit rate, the taxpayer ~~wil~~ will receive a larger tax receive a larger tax
savings from claiming the exclusion rather than the credit (in addition, the exclusion lowers their savings from claiming the exclusion rather than the credit (in addition, the exclusion lowers their
payroll taxes). For example, $100 of employer-sponsored child care saved in an FSA would lower payroll taxes). For example, $100 of employer-sponsored child care saved in an FSA would lower
a taxpayer’s income tax a taxpayer’s income tax ~~bil~~ bill by $35 if they were in the 35% tax bracket.by $35 if they were in the 35% tax bracket.2425 The tax savings The tax savings
associated with applying that $100 to the CDCTC would, by contrast, be $20. Hence, if associated with applying that $100 to the CDCTC would, by contrast, be $20. Hence, if
employer-sponsored child care is offered by their employer, a taxpayer may claim this benefit employer-sponsored child care is offered by their employer, a taxpayer may claim this benefit
first and apply any remaining eligiblefirst and apply any remaining eligible expenses (if applicable)expenses (if applicable)2526 toward the credit, lowering their toward the credit, lowering their
credit amount in comparison to if the exclusion was not available. credit amount in comparison to if the exclusion was not available.
Table 34. Distribution of Taxpayers, Credit Dollars,
and Average Credit Amount by Adjusted Gross Income (AGI), 2018
Adjusted Gross
% of All Returns
% of Aggregate
Average Credit
Income (AGI)
% of All Returns
Claiming CDCTC
CDCTC Dollars
Amount
$0-under $15K $0-under $15K
21.2% 21.2%
0.3% 0.3%
0.1% 0.1%
$124 $124
$15K-under $25K $15K-under $25K
12.9% 12.9%
5.3% 5.3%
3.1% 3.1%
$347 $347
$25K-under $50K $25K-under $50K
23.7% 23.7%
22.3% 22.3%
23.7% 23.7%
$623 $623
$50K-under $75K $50K-under $75K
14.0% 14.0%
15.2% 15.2%
15.1% 15.1%
$583 $583
$75K-under $100K $75K-under $100K
8.9% 8.9%
13.2% 13.2%
13.8% 13.8%
$613 $613
$100K-under $200K $100K-under $200K
13.8% 13.8%
30.2% 30.2%
31.1% 31.1%
$603 $603
$200K-under $500K $200K-under $500K
4.5% 4.5%
11.6% 11.6%
11.1% 11.1%
$564 $564
$500K+ $500K+
1.1% 1.1%
1.9% 1.9%
2.0% 2.0%
$611 $611
All Taxpayers
100.0%
100.0%
100.0%
$586
Source: IRS Statistics of Income (SOI) 2018, Table 3.3. IRS Statistics of Income (SOI) 2018, Table 3.3.
Some low- and moderate-income taxpayers may have received a Some low- and moderate-income taxpayers may have received a ~~smal er~~smaller benefit from the benefit from the
CDCTC after enactment of P.L. 115-97 (often referred to as the Tax Cuts and Job Act or TCJA), CDCTC after enactment of P.L. 115-97 (often referred to as the Tax Cuts and Job Act or TCJA),
which went into effect in 2018. Although the law did not directly modify CDCTC, other changes which went into effect in 2018. Although the law did not directly modify CDCTC, other changes

24 25 In 2018, a married couple filing jointly would In 2018, a married couple filing jointly would be in the 35% bracket if their taxable income wasbe in the 35% bracket if their taxable income was over $400,000 but over $400,000 but
not over $600,000. not over $600,000. ~~T his~~This taxpayer’s applicable credit rate for the taxpayer’s applicable credit rate for the ~~CDCT C would be 20%.~~
25CDCTC would be 20%. 26 If a taxpayer has one child, and If a taxpayer has one child, and receives $5,000 in tax-free employer-sponsored child care from their employer, they receives $5,000 in tax-free employer-sponsored child care from their employer, they
willwill have $0 of qualifyinghave $0 of qualifying expenses for the expenses for the ~~CDCT C~~CDCTC. .
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made by the law— made by the law—~~specifical y~~specifically those made to a different credit, the child tax credit (CTC)— those made to a different credit, the child tax credit (CTC)—
effectively mean that some low- and moderate-income families owe the same amount of income effectively mean that some low- and moderate-income families owe the same amount of income
taxes with or without the CDCTC. In other words, some low- and moderate-income families may taxes with or without the CDCTC. In other words, some low- and moderate-income families may
no longer receive a net benefit from the credit. The Tax Policy Center found that between 2017 no longer receive a net benefit from the credit. The Tax Policy Center found that between 2017
and 2018 the share of taxpayers with incomes between $20,000 and $30,000 who benefited from and 2018 the share of taxpayers with incomes between $20,000 and $30,000 who benefited from
the CDCTC the CDCTC ~~fel~~ fell from 5% to 2%. Similarly, for taxpayers with income between $30,000 and from 5% to 2%. Similarly, for taxpayers with income between $30,000 and
$40,000, the share of taxpayers who benefited from the CDCTC $40,000, the share of taxpayers who benefited from the CDCTC ~~fel~~ fell from 9% to 6%. For more from 9% to 6%. For more
information, seinformation, see Appendix B.
Average Credit Amount over Time
The CDCTC was enacted in 1976. Subsequent legislative changes increased the size of the credit The CDCTC was enacted in 1976. Subsequent legislative changes increased the size of the credit
by increasing the maximum amount of by increasing the maximum amount of ~~al owable~~allowable expenses and the credit rate (see expenses and the credit rate (see “A Brief
Overview of Major Legislative Changes to ~~Chi~~ldChild and Dependent Care Tax Benefits”). and Dependent Care Tax Benefits”).
Between 1976 and 1988, the average credit amount and aggregate amount of the credit steadily Between 1976 and 1988, the average credit amount and aggregate amount of the credit steadily
increased in real (i.e., inflation adjusted) dollars, as increased in real (i.e., inflation adjusted) dollars, as ~~il ustrated~~illustrated i in Figure 2. ~~Beginning~~3. Beginning in 1989, in 1989,
both the average and aggregate credit amount began to decline, with a sharp drop in the aggregate both the average and aggregate credit amount began to decline, with a sharp drop in the aggregate
amount claimed. This decline over such a short time period may be due to measures adopted by amount claimed. This decline over such a short time period may be due to measures adopted by
the IRS to reduce improper claims of tax benefits, as the IRS to reduce improper claims of tax benefits, as ~~wel~~ well as legislativeas legislative changes. First, beginning changes. First, beginning
in 1987, taxpayers were required to provide the Social Security numbers (SSNs) of dependents on in 1987, taxpayers were required to provide the Social Security numbers (SSNs) of dependents on
their federal income tax returns.their federal income tax returns.2627 Second, beginning in 1989, taxpayers had to provide the Second, beginning in 1989, taxpayers had to provide the
caregiver’s taxpayer ID number (caregiver’s taxpayer ID number (~~general y~~generally for individuals, their SSNs). for individuals, their SSNs).2728 According to one IRS According to one IRS
researcher, “What probably happened in most cases is that people were paying their babysitter off researcher, “What probably happened in most cases is that people were paying their babysitter off
the books, and their babysitter would not provide their Social Security numbers or go on the the books, and their babysitter would not provide their Social Security numbers or go on the
books, so the family had to choose between finding a new babysitter, or giving up the credit.”books, so the family had to choose between finding a new babysitter, or giving up the credit.”28
~~Final y~~29 Finally, in 1988, Congress enacted a provision as part of P.L. 100-485 (see, in 1988, Congress enacted a provision as part of P.L. 100-485 (see “A Brief Overview of
Major Legislative Changes to ~~Chi~~ldChild and Dependent Care Tax Benefits”) that required taxpayers to and Dependent Care Tax Benefits”) that required taxpayers to
reduce the amount of expenses applied to the credit by amounts received under the exclusion. reduce the amount of expenses applied to the credit by amounts received under the exclusion.
This may have resulted in a substantial reduction in the amount of expenses many taxpayers This may have resulted in a substantial reduction in the amount of expenses many taxpayers
applied toward the credit, and hence a applied toward the credit, and hence a ~~smal er~~smaller credit. credit.
Since 1988, the real average value of the CDCTC has steadily Since 1988, the real average value of the CDCTC has steadily ~~fal en~~fallen (se (see Figure 23). This trend . This trend
may be driven by several factors. First, as previously discussed, the parameters of the credit, may be driven by several factors. First, as previously discussed, the parameters of the credit,
including the maximum amount of qualifying expenses and the income brackets for each including the maximum amount of qualifying expenses and the income brackets for each
applicable credit rate (applicable credit rate (seesee Table 23) are not indexed for inflation. The last time the credit rate and are not indexed for inflation. The last time the credit rate and
maximum level of expenses was increased was in 2001 as part of the Economic Growth and Tax maximum level of expenses was increased was in 2001 as part of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16). Before EGTRRA the parameters of Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16). Before EGTRRA the parameters of
the credit had not been increased since 1981 (seethe credit had not been increased since 1981 (see “A Brief Overview of Major Legislative
Changes to Child and Dependent Care Tax Benefits”). If the credit as enacted in 1976 had been ). If the credit as enacted in 1976 had been
adjusted adjusted ~~annual y~~annually for inflation, the $800 maximum credit amount for two or more children in for inflation, the $800 maximum credit amount for two or more children in

~~26 In 1987, seven~~ 27 In 1987, 7 million fewer children were million fewer children were claimed as dependents on federal income tax returns according to data claimed as dependents on federal income tax returns according to data
summarizedsummarized by Jeffrey Liebman. Jeffrey Liebman, “Who are the Ineligible by Jeffrey Liebman. Jeffrey Liebman, “Who are the Ineligible ~~EIT C~~EITC Recipients?” Recipients?” National Tax Journal, ,
vol. 53, no. 4 (December 2000), p. 1171. vol. 53, no. 4 (December 2000), p. 1171.
2728 P.L. 100-485. P.L. 100-485.
2829 John Szilagyi, John Szilagyi, an IRSan IRS researcher quotedresearcher quoted ~~in T amar~~ in Tamar Lewin, “I.R.S. Sees Lewin, “I.R.S. Sees Evidence of Wide Evidence of Wide ~~T ax~~Tax Cheating on Child Cheating on Child
Care,” Care,” The New York Times, January 6, 1991. , January 6, 1991.
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1976 would have equaled more than $3,500 in 2018. 1976 would have equaled more than $3,500 in 2018.2930 Hence, inflation has eroded a substantial Hence, inflation has eroded a substantial
amount of the credit’s value. amount of the credit’s value.
Figure 23. Real Aggregate Credit Dollars and
Average Credit Amount, 1976-2018

Source: IRS Statistics of Income Table 3.3 and the Bureau of Labor Statistics CPI-U. IRS Statistics of Income Table 3.3 and the Bureau of Labor Statistics CPI-U.
Note: Nominal data were Nominal data were adjusted for inflation to 2018 dol ars using the CPI-U. adjusted for inflation to 2018 dol ars using the CPI-U.
Types of Qualifying Individuals Claimed for the Credit
Administrative data from the Internal Revenue Service, summarized iAdministrative data from the Internal Revenue Service, summarized in Table 4, ~~indicate~~5, indicate that the that the
CDCTC is used primarily for the care expenses of children under 13 years old. CDCTC is used primarily for the care expenses of children under 13 years old.

~~29 T his~~ 30 This amount was calculated amount was calculated ~~using~~ using the inflation calculator from the Bureau of Labor Statistics. the inflation calculator from the Bureau of Labor Statistics. ~~T his~~This calculator is calculator is
available at https://data.bls.gov/cgi-bin/cpicalc.pl. available at https://data.bls.gov/cgi-bin/cpicalc.pl.
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Table 45. Distribution of Taxpayers and Credit Dollars by
Age of Qualifying Individuals Claimed for CDCTC, 2017

Tax Returns
Total Credit Dollars
Age of Qualifying Individual(s)
Number
Percentage
Billions $
Percentage
Exclusively under 13 years old Exclusively under 13 years old
6,153,557 6,153,557
95.1% 95.1%
$3.53 $3.53
94.9% 94.9%
Exclusively 13 years old or older Exclusively 13 years old or older
159,184 159,184
2.5% 2.5%
$0.07 $0.07
2.0% 2.0%
Mix of over and under 13 years old Mix of over and under 13 years old
156,495 156,495
2.4% 2.4%
$0.12 $0.12
3.2% 3.2%
Total
6,469,236
100.0%
$3.72
100.0%
Source: Data provided to CRS from the Internal Revenue Service,Data provided to CRS from the Internal Revenue Service, Statistics of Income (SOI). Data availableStatistics of Income (SOI). Data available to to
congressionalcongressional clients from the authors upon request. clients from the authors upon request.
Notes: Items may not sum due to rounding. Items may not sum due to rounding.
Few taxpayers claim the CDCTC for older dependents. This may be a result of several factors. Few taxpayers claim the CDCTC for older dependents. This may be a result of several factors.
First, most dependents are children. For example, in 2017, over 83 First, most dependents are children. For example, in 2017, over 83 ~~mil ion~~million dependents were dependents were
children, while approximately 11 children, while approximately 11 ~~mil ion~~ million were older (including parents).were older (including parents).3031 Second, the definition Second, the definition
of qualifying expenses excludes many expenses incurred for older dependents. For example, if of qualifying expenses excludes many expenses incurred for older dependents. For example, if
older dependents are being cared for by a stay-at-home taxpayer, any expenses incurred for their older dependents are being cared for by a stay-at-home taxpayer, any expenses incurred for their
care care ~~wil~~ will not be considered qualifying expenses (because the caregiver is not considered to be not be considered qualifying expenses (because the caregiver is not considered to be
working or looking for work). In addition, certain eldercare expenses, like nursing home working or looking for work). In addition, certain eldercare expenses, like nursing home
expenses, are not considered qualifying expenses for the CDCTC because the individual being expenses, are not considered qualifying expenses for the CDCTC because the individual being
cared for is not living with the taxpayer for at least eight hours each day (see cared for is not living with the taxpayer for at least eight hours each day (see “Qualifying
Expenses”). ).
Percentage of Taxpayers with Children Who Claim the CDCTC
Data from the Tax Policy Center (TPC) indicate that on average about 12% of taxpayers with Data from the Tax Policy Center (TPC) indicate that on average about 12% of taxpayers with
children claim the child and dependent care credit, as children claim the child and dependent care credit, as ~~il ustrated~~illustrated i in Figure 3.314.32 A greater A greater
proportion of higher-income taxpayers with children claim the credit than lower-income proportion of higher-income taxpayers with children claim the credit than lower-income
taxpayers. One possible explanation for why relatively few families with children claim the credit taxpayers. One possible explanation for why relatively few families with children claim the credit
is that they do not have child care expenses (perhaps because their children are older). Another is that they do not have child care expenses (perhaps because their children are older). Another
possible explanation is that care expenses that are incurred are not considered qualifying expenses possible explanation is that care expenses that are incurred are not considered qualifying expenses
for the credit. For example, families with a stay-at-home parent would for the credit. For example, families with a stay-at-home parent would ~~general y~~generally be ineligible be ineligible for for
the CDCTC. In addition, familiesthe CDCTC. In addition, families paying an older child to look after a younger child would not be paying an older child to look after a younger child would not be
able to claim those expenses for the CDCTC. able to claim those expenses for the CDCTC. ~~Final y~~Finally, families eligible, families eligible for the exclusion and with for the exclusion and with
only one child may benefit more from the exclusion for employer-provided dependent care and only one child may benefit more from the exclusion for employer-provided dependent care and
simply not claim the CDCTC. simply not claim the CDCTC.

30 31 Internal Revenue Service, Individual Internal Revenue Service, Individual ~~Income T ax~~ Income Tax Returns Line Item Estimates, 2017, Publication 1304, Table 2.3. Returns Line Item Estimates, 2017, Publication 1304, Table 2.3.
3132 It is important to note that children as defined by the It is important to note that children as defined by the ~~T ax~~Tax Policy Center in this example are children for whom that Policy Center in this example are children for whom that
taxpayer can claim a dependent exemption or for whom taxpayer can claim a dependent exemption or for whom ~~th at~~that taxpayer can claim the child tax credit or earned income taxpayer can claim the child tax credit or earned income
tax credit (tax credit (~~EIT C~~EITC). Some of these children will). Some of these children will not be qualifyingnot be qualifying ~~individuals~~ individuals for the purposes of the for the purposes of the ~~CDCT C~~CDCTC, because, , because,
for example, they are 13 years or older. for example, they are 13 years or older.
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Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

Figure 34. Percentage of Taxpayers with Children Who Claim the CDCTC, 2018
By Income Quintile By Income Quintile

Source: Urban-Brookings Tax Policy Center Microsimulation Urban-Brookings Tax Policy Center Microsimulation Model (version 0718-1). Model (version 0718-1).
Notes: Each quintile contains 20% of the population ranked by expanded cash income (ECI). Each quintile contains 20% of the population ranked by expanded cash income (ECI).3233 Percentages are Percentages are
rounded to the nearest whole number. For purposes of this figure, taxpayers with children may include certain rounded to the nearest whole number. For purposes of this figure, taxpayers with children may include certain
children who are not qualifying individuals for the CDCTC, including childrenchildren who are not qualifying individuals for the CDCTC, including children 13 years old and older. 13 years old and older.
Fewer lower-income families with children benefit from the CDCTC, because the credit is Fewer lower-income families with children benefit from the CDCTC, because the credit is
nonrefundable. A nonrefundable credit is limitednonrefundable. A nonrefundable credit is limited to the taxpayer’s income tax liability. Taxpayers to the taxpayer’s income tax liability. Taxpayers
with littlewith little to no income tax liability,to no income tax liability, including low-income taxpayers, hence receive little to no including low-income taxpayers, hence receive little to no
benefit from nonrefundable credits. benefit from nonrefundable credits.

32 33 For distributional analyses, the For distributional analyses, the ~~T ax~~Tax Policy Center ( Policy Center (~~T PC~~TPC) uses an income concept called “expanded cash income” ) uses an income concept called “expanded cash income”
(ECI). ECI is a broad(ECI). ECI is a broad measure of pretax income, and is usedmeasure of pretax income, and is used both to rank tax units in distribution tables and to calculate both to rank tax units in distribution tables and to calculate
effective tax rates. According to the effective tax rates. According to the ~~T PC~~TPC, “We define ECI as adjusted, “We define ECI as adjusted ~~gross~~ gross income (AGI) plus: above-the-line income (AGI) plus: above-the-line
adjustments (e.g., IRA deductions,adjustments (e.g., IRA deductions, student loan interest, self-employed health insurance deduction, etc.), employer-paid student loan interest, self-employed health insurance deduction, etc.), employer-paid
health insurance and other nontaxable fringe benefits, employee and employer contributions to taxhealth insurance and other nontaxable fringe benefits, employee and employer contributions to tax -deferred retirement -deferred retirement
savingssavings plans, tax-exempt interest, nontaxable Social Security benefits, nontaxable pension and retirement income, plans, tax-exempt interest, nontaxable Social Security benefits, nontaxable pension and retirement income,
accrualsaccruals within definedwithin defined benefit pension plans, insidebenefit pension plans, inside ~~buildup~~ buildup within definedwithin defined contribution retirement accounts, cash and contribution retirement accounts, cash and
cash-like (e.g., SNAP) transfer income, employer’s share of payroll taxes, and imputed corporate income tax liability.” cash-like (e.g., SNAP) transfer income, employer’s share of payroll taxes, and imputed corporate income tax liability.”
For more information, see For more information, see ~~T ax~~Tax Policy Center, Policy Center, TPC’s ~~Microsim ulation~~Microsimulation Model FAQ, http://www.taxpolicycenter.org/, http://www.taxpolicycenter.org/
resources/tpcs-microsimulation-model-faq. resources/tpcs-microsimulation-model-faq. ~~T he~~The income percentile classes used income percentile classes used in this table are basedin this table are based on the income on the income
distribution for the entire population and contain an equal number of people, not tax units. distribution for the entire population and contain an equal number of people, not tax units. ~~T he~~The incomes used are incomes used are
adjustedadjusted for family sizefor family size by dividingby dividing by the squareby the square root of the number of people in the tax unit. root of the number of people in the tax unit. ~~T he r esulting~~The resulting percentile percentile
breaks are (in 2018 dollars): 20% $25,100; 40% $49,300; 60% $85,900; 80% $153,300breaks are (in 2018 dollars): 20% $25,100; 40% $49,300; 60% $85,900; 80% $153,300 . .
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Data on the Exclusion of Employer-Sponsored Child
and Dependent Care
Survey data from the Bureau of Labor Statistics (BLS) indicate that about 43% of employees Survey data from the Bureau of Labor Statistics (BLS) indicate that about 43% of employees
have access to child and dependent care flexible spending accounts, while 11% have access to have access to child and dependent care flexible spending accounts, while 11% have access to
employer-sponsored child care.employer-sponsored child care.3334 The survey also found that availability of these benefits differed The survey also found that availability of these benefits differed
based on a variety of factors, including the average wage paid to the employee and size of based on a variety of factors, including the average wage paid to the employee and size of
employer, as summarized iemployer, as summarized in Table 5. ~~Overal~~ 6. Overall, the data indicate that these benefits are more , the data indicate that these benefits are more
widely availablewidely available to more highly compensated employees and employees at larger establishments. to more highly compensated employees and employees at larger establishments.
Table 56. Percentage of Civilian Workers with Access to
Employer-Sponsored Child and Dependent Care, 2020
Access to Dependent
Care Flexible Spending
Access to Employer-

Account (FSA)a
Provided Child Care
Average Wageb

Lowest 10% Lowest 10%
13% 13%
5% 5%
Lowest 25% Lowest 25%
20% 20%
5% 5%
Second 25% Second 25%
40% 40%
8% 8%
Third 25% Third 25%
52% 52%
13% 13%
Highest 25% Highest 25%
65% 65%
20% 20%
Highest 10% Highest 10%
68% 68%
23% 23%
Size of Employer

1-49 workers 1-49 workers
21% 21%
5% 5%
50-99 workers 50-99 workers
37% 37%
7% 7%
100-499 workers 100-499 workers
51% 51%
9% 9%
500 workers 500 workers or more or more
71% 71%
25% 25%
Source: Bureau of Labor Statistics,Bureau of Labor Statistics, National Compensation Survey: EmployeeNational Compensation Survey: Employee Benefits in the United States, Benefits in the United States,
March 2020, Tables 39 and 40. March 2020, Tables 39 and 40.
Notes: These results are for civilianThese results are for civilian ~~employees only.~~
employees only. a. These data reflect access to FSAs provided as part of a Section 125 cafeteria plan. a. These data reflect access to FSAs provided as part of a Section 125 cafeteria plan.
b. Surveyed occupations are classifiedb. Surveyed occupations are classified into wage categoriesinto wage categories based on the average wage for the occupation based on the average wage for the occupation
which may include workers which may include workers with earnings both above and below the threshold. with earnings both above and below the threshold.
The BLS data provide information on dependent care benefits that are available to workers. Data The BLS data provide information on dependent care benefits that are available to workers. Data
from the IRS based on W-2 information returns, however, suggest actual use of these benefits is from the IRS based on W-2 information returns, however, suggest actual use of these benefits is
relatively low. The most recent data available indicate about 1.5 relatively low. The most recent data available indicate about 1.5 ~~mil ion~~ million taxpayers received tax-taxpayers received tax-
free employer-sponsored dependent care benefits in 2017.free employer-sponsored dependent care benefits in 2017.3435 In comparison, during the same year In comparison, during the same year

~~33 Bureau~~ 34 Bureau of Labor Statistics, of Labor Statistics, National Compensation Survey: Employee Benefits in the United States, March 2020, , March 2020,
~~T ables~~Tables 39 and 40. For purposes of this survey, employer-sponsored child care is 39 and 40. For purposes of this survey, employer-sponsored child care is defined as a workplace program that defined as a workplace program that
“provides for either the full or partial cost of caring for an employee’s children in a nursery, day care center, or a baby “provides for either the full or partial cost of caring for an employee’s children in a nursery, day care center, or a baby
sitter in facilities either on or off the employer’s premises.” sitter in facilities either on or off the employer’s premises.”
3435 Internal Revenue Service, Internal Revenue Service, SOI Tax Stats - Individual Information Return Form W-2 Statistics, , ~~T able~~Table 5A, 5A,
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Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

there were about 153 there were about 153 ~~mil ion~~million returns filed, 6.5 returns filed, 6.5 ~~mil ion~~ million of which included the CDCTC.of which included the CDCTC.3536 Results Results
from one recent survey of low- and moderate-income taxpayers suggest that low employee from one recent survey of low- and moderate-income taxpayers suggest that low employee
participation in dependent care FSAs may be due to (1) employees’ confusion about the rules participation in dependent care FSAs may be due to (1) employees’ confusion about the rules
governing dependent care FSAs, (2) employees’ difficulties in determining whether they would governing dependent care FSAs, (2) employees’ difficulties in determining whether they would
benefit from participating in a dependent care FSA, and (3) employees confounding dependent benefit from participating in a dependent care FSA, and (3) employees confounding dependent
care FSAs with similar plans such as health FSAs and health savings accounts (HSAs).care FSAs with similar plans such as health FSAs and health savings accounts (HSAs).3637 In In
addition, a recent study on participation in health FSAs found evidence that employees may be addition, a recent study on participation in health FSAs found evidence that employees may be
particularly concerned about the risk of losing unused funds at the end of the plan year (the “use particularly concerned about the risk of losing unused funds at the end of the plan year (the “use
or lose” rule) when determining whether to participate in a FSA.or lose” rule) when determining whether to participate in a FSA.37

38 https://www.irs.gov/statistics/soi-tax-stats-individual-information-return-form-w2-statistics. https://www.irs.gov/statistics/soi-tax-stats-individual-information-return-form-w2-statistics.
35 36 Internal Revenue Service, Internal Revenue Service, SOI Tax Stats - Individual Statistical Tables by Size of Adjusted Gross Income, , ~~T able~~Table 3.3, 3.3,
https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income. https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income.
3637 Ellen Frank-Miller, Sophia Fox-Dichter, and Sloane Wolter, Ellen Frank-Miller, Sophia Fox-Dichter, and Sloane Wolter, Dependent Care FSAs: The Uneven Playing Field for
~~Em ployers~~Employers and Workers,, Washington University in St. LouisWashington University in St. Louis ~~Social~~ Social Policy Institute White PaperPolicy Institute White Paper , 19-01, , 19-01,
https://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=1002&context=spi_research. https://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=1002&context=spi_research.
37 38 James H. Cardon, “Status quo James H. Cardon, “Status quo ~~bias~~ bias in flexible spendingin flexible spending account usage,”account usage,” Journal of Behavioral and Experimental
~~Econom ics~~Economics, vol. 81, 2019, https://doi.org/10.1016/j.socec.2019.05.007. , vol. 81, 2019, https://doi.org/10.1016/j.socec.2019.05.007.
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Appendix A. What Is a “Dependent” for Tax
Purposes?
Prior to enactment of P.L. 115-97, taxpayers could subtract from their adjusted gross income Prior to enactment of P.L. 115-97, taxpayers could subtract from their adjusted gross income
(AGI) the standard deduction or sum of their itemized deductions (whichever is greater) and the (AGI) the standard deduction or sum of their itemized deductions (whichever is greater) and the
appropriate number of personal exemptions for themselves, their spouse (if married), and their appropriate number of personal exemptions for themselves, their spouse (if married), and their
dependents. dependents.
For 2017, the personal exemption amount was $4,050 per person. Under P.L. 115-97, the personal For 2017, the personal exemption amount was $4,050 per person. Under P.L. 115-97, the personal
exemption amount was reduced to zero from 2018 through the end of 2025. While the personal exemption amount was reduced to zero from 2018 through the end of 2025. While the personal
exemption is not in effect from 2018 through 2025, the definition of dependent for the exemption exemption is not in effect from 2018 through 2025, the definition of dependent for the exemption
was retained and other provisions in the tax code was retained and other provisions in the tax code ~~stil~~ still refer to this definition. refer to this definition.
A dependent is either (1) a qualifying child or (2) a qualifying relative. There are several tests to A dependent is either (1) a qualifying child or (2) a qualifying relative. There are several tests to
determine whether an individual is a taxpayer’s qualifying child or relative, outlined determine whether an individual is a taxpayer’s qualifying child or relative, outlined inin Table A-1. .
An individualAn individual ~~must fulfil al~~ must fulfill all these requirements to be considered a qualifying child or qualifying these requirements to be considered a qualifying child or qualifying
relative (e.g., an individual must relative (e.g., an individual must ~~fulfil~~ fulfill the relationship, residence, age, support, and joint return test the relationship, residence, age, support, and joint return test
to be considered a qualifying child for tax purposes). to be considered a qualifying child for tax purposes).
Table A-1. Tests for Qualifying Child and Qualifying Relative
Qualifying Child
Qualifying Relative
Relationship: The child is the taxpayer’s son, The child is the taxpayer’s son,
1. Member of Household or Relationship: The The
daughter, stepchild, foster child, brother, sister, daughter, stepchild, foster child, brother, sister, half-half-
individual must be either (a) a member individual must be either (a) a member of the of the
brother, half-sister, brother, half-sister, stepbrother, stepsister,stepbrother, stepsister, or a or a
taxpayer’s household for the entire year, or (b) if they taxpayer’s household for the entire year, or (b) if they
descendant of any of them. descendant of any of them.
do not live with the taxpayer, a relative do not live with the taxpayer, a relative of the of the
~~taxpayer.a~~ taxpayer.a
Residence: The child must have lived with the The child must have lived with the
Gross Income Test: The individual’s gross The individual’s gross income income
taxpayer for more taxpayer for more than half the year. than half the year.
must be less than the personal exemption amount must be less than the personal exemption amount
($4,050 in 2017). ($4,050 in 2017).
Age: The child is either The child is either (a) under 19 years old at the (a) under 19 years old at the
Age: None None
end of the year; (b) under 24 years old at the end of end of the year; (b) under 24 years old at the end of
the year and a ful -time student; or (c) any age if the year and a ful -time student; or (c) any age if
permanently and total y disabled. permanently and total y disabled.
Support: The child must not have provided moreThe child must not have provided more ~~than~~ than Support: The taxpayer must provide moreThe taxpayer must provide more than half of than half of
half of his or her own support for the year.half of his or her own support for the year.
the qualifying individual’s support for the year. the qualifying individual’s support for the year.
Joint Return: The child must not be filing a joint The child must not be filing a joint
Not a qualifying child: The individual cannot be The individual cannot be
return for the year (unless that joint return is filed only return for the year (unless that joint return is filed only
claimed claimed as a qualifying child by any taxpayer. as a qualifying child by any taxpayer.
to claim to claim a refund of withheld income tax or estimated a refund of withheld income tax or estimated
tax paid). tax paid).
Source: IRS Publication 501 and Internal Revenue Code (IRC) §152. IRS Publication 501 and Internal Revenue Code (IRC) §152.
a. The individual is related to the taxpayer as their son, daughter, stepchild, foster child, brother, sister,a. The individual is related to the taxpayer as their son, daughter, stepchild, foster child, brother, sister, ~~half~~ half--
brother, half-sister, brother, half-sister, stepbrother, stepsister,stepbrother, stepsister, or a descendant of any of them; father, mother, grandparent, or or a descendant of any of them; father, mother, grandparent, or
other direct ancestor; stepfather or stepmother; son or daughter of the taxpayer’s brother or sister;other direct ancestor; stepfather or stepmother; son or daughter of the taxpayer’s brother or sister; son or son or
daughter of the taxpayer’s half-brother or half-sister; the taxpayer’s aunt or uncle, the taxpayer’s son-in-law, daughter of the taxpayer’s half-brother or half-sister; the taxpayer’s aunt or uncle, the taxpayer’s son-in-law,
daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

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Appendix B. Evaluating the Impact of the CDCTC
After the Tax Cuts and Jobs Act (TCJA; P.L. 115-97)
IRS data indicate that the average dollar amount of the CDCTC has largely remained unchanged IRS data indicate that the average dollar amount of the CDCTC has largely remained unchanged
in recent years (see in recent years (see “Average Credit Amount over Time”). However, some low- and moderate- ). However, some low- and moderate-
income taxpayers may find that the CDCTC provides less of a benefit now than it did prior to income taxpayers may find that the CDCTC provides less of a benefit now than it did prior to
2018 because of changes to the tax code made by P.L. 115-97, often referred to as the Tax Cuts 2018 because of changes to the tax code made by P.L. 115-97, often referred to as the Tax Cuts
and Jobs Act or TCJA.and Jobs Act or TCJA.38
39 Although the law did not directly modify the CDCTC, other changes made by the law— Although the law did not directly modify the CDCTC, other changes made by the law—
~~specifical y~~specifically those made to a different credit, the child tax credit (CTC)—may effectively mean those made to a different credit, the child tax credit (CTC)—may effectively mean
that some low- and moderate-income families owe the same amount of income taxes with or that some low- and moderate-income families owe the same amount of income taxes with or
without the CDCTC. In other words, some of these families may no longer receive a net benefit without the CDCTC. In other words, some of these families may no longer receive a net benefit
from the CDCTC.from the CDCTC.3940 However, other changes made by the law may result in the taxpayer receiving However, other changes made by the law may result in the taxpayer receiving
a larger a larger ~~overal~~ overall benefit from the tax system (i.e., a large refund), even if the value of their benefit from the tax system (i.e., a large refund), even if the value of their
CDCTC is lessened. CDCTC is lessened.
As Elaine Maag at the Tax Policy Center As Elaine Maag at the Tax Policy Center ~~notes:40~~notes41
Under prior law, families could receive their full $1,000 Under prior law, families could receive their full $1,000 per child CTC as a refund. But per child CTC as a refund. But
when the CTC was increased to $2,000 (as other tax benefits were reduced) [as part of the when the CTC was increased to $2,000 (as other tax benefits were reduced) [as part of the
TCJA], only part of the CTC increase was made refundable [$1,400]. Thus, families that TCJA], only part of the CTC increase was made refundable [$1,400]. Thus, families that
wouldwould ~~have received their full CTC as a refund last year now receive only part of their~~
~~(increased) CTC as a refund. The rest of the CTC is used to offset income taxes~~ have received their full CTC as a refund last year now receive only part of their (increased) CTC as a refund. The rest of the CTC is used to offset income taxes owed, owed,
reducing the benefit possible from the CDCTC. reducing the benefit possible from the CDCTC.
An example of the impact of the CDCTC on income tax liabilities An example of the impact of the CDCTC on income tax liabilities before and after the TCJA may before and after the TCJA may
help to help to ~~il ustrate~~illustrate this issue. In both cases presented i this issue. In both cases presented in Table B-1, it it is assumed that a single parent is assumed that a single parent
has $28,000 of earned income, $6,000 in qualifying child care expenses, and two qualifying has $28,000 of earned income, $6,000 in qualifying child care expenses, and two qualifying
children. (Those children are also assumed to be eligiblechildren. (Those children are also assumed to be eligible to be claimed for two other tax benefits to be claimed for two other tax benefits
often claimed by working families with children—the earned income tax credit, or EITC, and the often claimed by working families with children—the earned income tax credit, or EITC, and the
CTC.) Further, the taxpayer is assumed to have no other income and claims the standard CTC.) Further, the taxpayer is assumed to have no other income and claims the standard
deduction. Calculations of precredit liabilitydeduction. Calculations of precredit liability and the child tax credit differ between the two time and the child tax credit differ between the two time
periods because of various changes made to the individual income tax by the TCJA.periods because of various changes made to the individual income tax by the TCJA.~~41 The EITC~~

~~38 T he~~42 The EITC 39 The original title of the law, the original title of the law, the ~~T ax~~Tax Cuts and Jobs Cuts and Jobs Act, wasAct, was stricken before final passage becausestricken before final passage because it violated what is it violated what is
known asknown as the Byrd rule,the Byrd rule, a procedural rulea procedural rule that can be raisedthat can be raised in the Senate when bills,in the Senate when bills, like the tax bill, are considered like the tax bill, are considered
under the process of reconciliation. under the process of reconciliation. ~~T he~~The actual title of the law is actual title of the law is ~~“T o~~ “To provide for reconciliation pursuant to titles II and provide for reconciliation pursuant to titles II and
VV of the concurrent resolution on the budget for fiscalof the concurrent resolution on the budget for fiscal year 2018.” For more information on the Byrd rule, see CRS year 2018.” For more information on the Byrd rule, see CRS
Report RL30862, Report RL30862, The Budget Reconciliation Process: The Senate’s “Byrd Rule”, by Bill Heniff Jr. , by Bill Heniff Jr.
~~39 T he~~40 The analysis done by the analysis done by the ~~T ax~~Tax Policy Center analyzed how taxes would Policy Center analyzed how taxes would change with andchange with and without the without the ~~CDCT C~~CDCTC before before
and after P.L. 115-97 in order to determine the value of the and after P.L. 115-97 in order to determine the value of the ~~CDCT C~~CDCTC. According to the IRS, the . According to the IRS, the ~~CDCT C is~~ CDCTC is applied to applied to
(and hence reduces)(and hence reduces) income tax liability before the nonrefundable portion of the child creditincome tax liability before the nonrefundable portion of the child credit . However, only focusing . However, only focusing
on the dollar amount of the on the dollar amount of the ~~CDCT C~~CDCTC, without examining how the presence of the , without examining how the presence of the ~~CDCT C~~CDCTC affects income affects income ~~t ax~~tax liabilities, liabilities,
may provide an incomplete picture of the benefitmay provide an incomplete picture of the benefit ’s impact in the broader context of the federal income tax code. ’s impact in the broader context of the federal income tax code.
40 41 Elaine Maag, Elaine Maag, ~~“How T he T ax~~ “How The Tax Cuts And Cuts And Jobs Act ReducedJobs Act Reduced ~~T he Value Of T he~~ The Value Of The Child Care Credit,” Child Care Credit,” ~~T ax~~Tax Policy Center, Policy Center,
TaxVox Blog, November 27, 2018, https://www.taxpolicycenter.org/taxvox/how-tax-cuts-and-jobs-act-reduced-value-, November 27, 2018, https://www.taxpolicycenter.org/taxvox/how-tax-cuts-and-jobs-act-reduced-value-
child-care-creditchild-care-credit . .
4142 For more information, see CRS For more information, see CRS Report R45092, Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax
Law, coordinated by Molly F. Sherlock and Donald J. Marples; and CRS, coordinated by Molly F. Sherlock and Donald J. Marples; and CRS Report R45124, Report R45124, The Child Tax Credit:
Legislative History,, by Margot L. Crandall-Hollick. by Margot L. Crandall-Hollick.
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was was ~~general y~~generally unchanged by the law, although its value is unchanged by the law, although its value is ~~annual y~~annually adjusted for inflation, and that adjusted for inflation, and that
inflation adjustment was changed by the law.inflation adjustment was changed by the law.42
43 Table B-1. Impact of the CDCTC on Income Tax Liability After the TCJA
Single parent with two qualifying children, $28,000 of earned income, Single parent with two qualifying children, $28,000 of earned income, and $6,000 in qualifying child care and $6,000 in qualifying child care
expenses expenses
2018
2017

(post-TCJA) (post-TCJA)
(pre-TCJA) (pre-TCJA)

No No
No No
CDCTC CDCTC
CDCTC CDCTC
CDCTC CDCTC
CDCTC CDCTC
Precredit Income Tax Precredit Income Tax ~~Liabilit~~yaLiabilitya
$1,000 $1,000
$1,000 $1,000
$650 $650
$650 $650
Child and Dependent Care Credit (CDCTC) Child and Dependent Care Credit (CDCTC)
$1,000 $1,000
$0 $0
$650 $650
$0 $0
Child Tax Credit (CT Child Tax Credit (CTC)b
$2,800 $2,800
$3,800 $3,800
$2,000 $2,000
$2,000 $2,000
CTC—nonrefundable portion
$0
$1,000
$0
$650
CTC—refundable portion
$2,800
$2,800
$2,000
$1,350
Earned Income Tax Credit (EIT Earned Income Tax Credit (EITC)c
$3,749 $3,749
$3,749 $3,749
$3,582 $3,582
$3,582 $3,582
Final Tax Liability Final Tax Liability
-$6,549 -$6,549
-$6,549 -$6,549
-$5,582 -$5,582
-$4,932 -$4,932
Net Impact of the CDCTC on Income Tax
Liabilities $0
$650
~~Liabilities~~
Source: Calculations using NBER TAXSIM. Calculations using NBER TAXSIM.
Notes: A negative income tax liability indicates a net benefit from the income tax code. The taxpayer is assumed A negative income tax liability indicates a net benefit from the income tax code. The taxpayer is assumed
to file as a head of household. to file as a head of household.
a. The TCJA made numerous changes to the individual income tax system that may affect a taxpayer’s liability a. The TCJA made numerous changes to the individual income tax system that may affect a taxpayer’s liability
before tax credits. before tax credits. See CRS Report R45092, See CRS Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax
Law, coordinated by Mol y F. Sherlock, coordinated by Mol y F. Sherlock and Donald J. Marples. and Donald J. Marples.
b. The TCJA made numerous changes to the child credit. See CRS Report R45124, b. The TCJA made numerous changes to the child credit. See CRS Report R45124, The Child Tax Credit:
Legislative History,, by Margot L. by Margot L. ~~Crandal~~ Crandall-Hol ick. -Hol ick.
c. The TCJA did not change major c. The TCJA did not change major aspects of the EITC, although it did change how it was adjusted for aspects of the EITC, although it did change how it was adjusted for
inflation. See CRS Report R43805, inflation. See CRS Report R43805, The Earned Income Tax Credit (EITC): How It Works and Who Receives It, by , by
Margot L. Margot L. ~~Crandal~~ Crandall-Hol ick,-Hol ick, Gene Falk, and Conor F. Boyle. Gene Falk, and Conor F. Boyle.
As As ~~il ustrated i~~nillustrated in Table B-1 above, in 2018 this taxpayer’s final income tax liabilityabove, in 2018 this taxpayer’s final income tax liability (a refund of (a refund of
$6,549) is unchanged by the CDCTC in 2018. (Per the IRS, the CDCTC is claimed before the $6,549) is unchanged by the CDCTC in 2018. (Per the IRS, the CDCTC is claimed before the
nonrefundable portion of the child tax credit.) The $1,000 CDCTC effectively reduces the nonrefundable portion of the child tax credit.) The $1,000 CDCTC effectively reduces the
nonrefundable child tax credit by the same amount. The refundable portion of the child credit, nonrefundable child tax credit by the same amount. The refundable portion of the child credit,
capped at $2,800 for two children in this example, is unchanged. In contrast, before the TCJA capped at $2,800 for two children in this example, is unchanged. In contrast, before the TCJA
changes, the CDCTC would have reduced the income tax liability for this taxpayer by $650 changes, the CDCTC would have reduced the income tax liability for this taxpayer by $650
(increasing their refund from $4,932 to $5,582). In this case, since the taxpayer can receive (increasing their refund from $4,932 to $5,582). In this case, since the taxpayer can receive al all of of
the child credit as the refundable portion, the CDCTC does not reduce the total CTC. Instead, the the child credit as the refundable portion, the CDCTC does not reduce the total CTC. Instead, the
CDCTC shifts receipt of the child tax credit from the nonrefundable portion to the refundable CDCTC shifts receipt of the child tax credit from the nonrefundable portion to the refundable
portion. Even though the CDCTC itself is larger in 2018 than 2017 ($1,000 vs. $650), in this portion. Even though the CDCTC itself is larger in 2018 than 2017 ($1,000 vs. $650), in this
example its impact on how much the taxpayer owes in taxes is reduced due to changes in the example its impact on how much the taxpayer owes in taxes is reduced due to changes in the
child tax credit. child tax credit.

42 43 For more information, see CRS For more information, see CRS Report R43805, Report R43805, The Earned Income Tax Credit (EITC): How It Works and Who
Receives It, by Margot L. Crandall-Hollick, Gene, by Margot L. Crandall-Hollick, Gene Falk, and Conor F. Boyle. Falk, and Conor F. Boyle.
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link to page 26 link to page 26 Child and Dependent Care Tax Benefits: How They Work and Who Receives Them

According to analysis done by the Tax Policy Center on the impact of the CDCTC on income tax According to analysis done by the Tax Policy Center on the impact of the CDCTC on income tax
liabilities,liabilities, between 2017 and 2018 the share of taxpayers with incomes between $20,000 and between 2017 and 2018 the share of taxpayers with incomes between $20,000 and
$30,000 who benefited from the child care credit decreased from 5% to 2%. In addition, “about 6 $30,000 who benefited from the child care credit decreased from 5% to 2%. In addition, “about 6
percent of families with incomes between $30,000 and $40,000 percent of families with incomes between $30,000 and $40,000 ~~wil~~ will benefit from the child care benefit from the child care
credit in 2018, down a third from the 9 percent who benefited in 2017.”credit in 2018, down a third from the 9 percent who benefited in 2017.”4344
While the CDCTC credit value may have While the CDCTC credit value may have ~~fal en~~fallen for some low- and moderate-income families, the for some low- and moderate-income families, the
expansion of the child tax credit (and other changes made by P.L. 115-97) may offset some or expansion of the child tax credit (and other changes made by P.L. 115-97) may offset some or al
all of these losses, as of these losses, as ~~il ustrated~~illustrated i in Table B-1, leaving taxpayers with a larger net benefit (a refund of leaving taxpayers with a larger net benefit (a refund of
$6,549 vs. $5,582). $6,549 vs. $5,582).

Author Information

Margot L. Crandall-Hollick Margot L. Crandall-Hollick
Conor F. Boyle Conor F. Boyle
Acting Section Research Manager Acting Section Research Manager
Analyst in Social Policy Analyst in Social Policy

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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43 44 For more information, see Elaine Maag, “How For more information, see Elaine Maag, “How ~~T he T ax~~The Tax Cuts And Jobs Cuts And Jobs Act ReducedAct Reduced ~~T he~~ The Value Value ~~Of T he~~ Of The Child Care Child Care
Credit,” Credit,” ~~T ax~~Tax Policy Center, Policy Center, TaxVox Blog, November 27, 2018, https://www.taxpolicycenter.org/taxvox/how-tax-cuts-, November 27, 2018, https://www.taxpolicycenter.org/taxvox/how-tax-cuts-
and-jobs-act-reduced-value-child-care-credit. and-jobs-act-reduced-value-child-care-credit.
Congressional Research Service Congressional Research Service
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