COVID-19: Child Care Tax Provisions in H.R. 7327

INSIGHTi
COVID-19: Child Care Tax Provisions in H.R.
7327
July 24, 2020
The Coronavirus Disease (COVID-19) pandemic has broadly impacted child care in the United States.
Surveys conducted in April of both working families with young children and child care providers found
that the majority of child care providers had fully closed or reduced their enrollment. Data from the
Bureau of Labor Statistics suggest that the number of child care workers decreased by about one-third
between March and April (see Table B-1) and about one-quarter between March and June, with the latter
number potential y reflecting the effects of states partial y reopening. Parents and providers have
questions about if and when child care facilities wil be able to reopen safely. The COVID-19 pandemic
has also amplified concerns about child care affordability.
As Congress continues to debate whether more needs to be done to address child care at the federal level,
the House Rules Committee recently reported a resolution that would al ow the House to consider two
bil s related to child care. One of those bil s, the Child Care for Economic Recovery Act (H.R. 7327),
includes several tax provisions, as summarized in this Insight. A discussion of nontax child care
provisions in H.R. 7327 can be found here.
Child and Dependent Care Tax Credit (CDCTC)
Under current law, eligible taxpayers may claim the child and dependent care tax credit (CDCTC) to help
offset their out-of-pocket work-related child and dependent care expenses.
The credit equals qualifying child and dependent care expenses—capped at $3,000 if the taxpayer has one
qualifying individual and up to $6,000 if they have two or more qualifying individuals—multiplied by a
credit rate. The credit rate varies based on adjusted gross income (AGI), with a maximum credit rate of
35% for taxpayers with AGI of $15,000 or less, gradual y declining to 20% for taxpayers with AGI above
$43,000. These dollar amounts are not adjusted for inflation. Because the credit is nonrefundable, the
final credit amount is further limited by the taxpayer’s income tax liability (e.g., taxpayers with no
income tax liability receive no credit).
H.R. 7327 would:
1. Make the credit refundable (so the credit would no longer be limited by income tax
liability).
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2. Increase the maximum amount of qualifying expenses to $6,000 for one qualifying
individual (from $3,000), $12,000 for two or more qualifying individuals (from $6,000).
3. Increase the maximum credit rate to 50% (from 35%) and raise the threshold where the
rate begins to decline to $120,000 (from $15,000).
4. Adjust the maximum dollar amounts and AGI thresholds for inflation going forward.
Similar changes were proposed in the HEROES Act (H.R. 6800).
The maximum potential credit amount of the CDCTC would increase under this proposal. However,
lower-income taxpayers are less likely than higher-income households to receive the maximum credit,
under current law or this proposal, because they tend to incur less in out-of-pocket child and dependent
care expenses.

The modifications to the CDCTC would increase the deficit by an estimated $88.7 bil ion from FY2020
to FY2030.
Dependent Care Flexible Spending Arrangements (FSAs)
Under current law, an employee can receive up to $5,000 in pretax employer-sponsored child and
dependent care benefits, often as a flexible spending account or FSA (this limit is per taxpayer, not per
dependent). This amount is not adjusted for inflation. General y, contributions to a dependent care FSA
are subject to a “use-or-lose” rule—after the end of the FSA’s plan year, employees forfeit any remaining
unused amounts. Employers are normal y al owed to offer employees a “grace period” of up to 2½
months after the end of the plan year to use any remaining balance.
H.R. 7327 would:
1. Increase the maximum amount of pretax benefits from $5,000 to $10,500 and annual y
adjust this amount for inflation going forward;

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2. Al ow employers to extend the grace period for up to 12 months after the end of a plan
year ending in 2020 (expanding upon flexibilities already provided by the IRS);
3. Al ow employers to offer a one-time “carry over” of the full value of their dependent care
benefits from the 2020 to the 2021 plan year, (i.e., temporarily eliminating the use-or-lose
rule).
The modifications to the exclusion would reduce net federal revenues by an estimated $2.5 bil ion from
FY2020-FY2030.
Employer Payroll Tax Credits
H.R. 7327 would create two new temporary refundable payroll tax credits for employers.
1. A 30% credit for qualified dependent care expenses employers pay on behalf of
employees. Credit-eligible dependent care expenses would be limited to $2,500 per
calendar quarter per employee. Taxpayers electing to claim the credit for dependent care
expenses cannot claim any other deduction or credit for dependent care expenses on the
amount of credit received. Federal government employers would not be eligible for the
credit.
2. A 50% credit for fixed expenses (e.g., rent, mortgage, or utility costs) of qualified child
care facilities. Credit-eligible child care facility fixed expenses would be limited to the
lesser of (1) fixed expenses paid during the same quarter in 2019; (2) $25 mil ion; or (3)
the greater of 25% of qualified wages (as defined in the employee retention tax credit) or
6.25% of 2019 gross receipts. Credit-eligible child care facility fixed expenses would be
further limited to $50,000 per calendar quarter. Qualifying facilities must be subject to a
full or partial suspension of services due to COVID-19, or have a 50% decline in gross
receipts from the previous year (with a partial credit al owed to taxpayers with a decline
in gross receipts of at least 10% but less than 50%). Taxpayers electing to receive this
credit cannot also deduct as a business expense the amount of credit received. Federal,
state, or local government employers would not be eligible for the credit.
Like the payroll tax credits enacted for newly mandated paid family and medical leave in the Families
First Coronavirus Response Act (P.L. 116-127), and the employee retention tax credit enacted in the
CARES Act, employers could receive these credits in advance of when payroll taxes are due. The credits
could be claimed on qualifying expenses paid from the date of enactment through December 31, 2020.
These payroll tax credits would be claimed against the employer’s share of Social Security’s old age,
survivors, and disability (OASDI) payroll tax, currently 6.2% of the employee’s taxable earnings base
($137,700 in 2020). A general fund transfer of revenue to the Old-Age and Survivors Insurance Trust
Fund, Federal Disability Insurance Trust Fund, and Railroad Retirement Trust Fund would be made to
maintain trust fund balances.
The temporary employer-paid dependent care payroll tax credit would reduce federal revenue by an
estimated $21 mil ion in FY2021. The temporary child care facility fixed expense payroll tax credit would
reduce federal revenue by an estimated $84 mil ion in FY2021.
Employee Retention Tax Credit for Domestic Workers
The CARES Act enacted an employee retention tax credit that al ows eligible employers to claim a 50%
payroll tax credit on up to $10,000 of qualified wages paid per employee while the business is closed or
has reduced operations due to COVID-19. Currently, only employers operating a trade or business qualify
for the credit. Household employers do not qualify.

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H.R. 7327 would al ow employers of domestic workers to claim the employee retention tax credit for
wages paid when employee services are not provided due to COVID-19.
Expanding the temporary employee retention tax credit to include domestic workers would reduce federal
revenue by an estimated $9 mil ion from FY2020 to FY2021.




Author Information

Conor F. Boyle
Molly F. Sherlock
Analyst in Social Policy
Specialist in Public Finance


Margot L. Crandall-Hollick

Acting Section Research Manager




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