Refundable child and dependent care tax credit
The child and dependent care tax credit (CDCC) provides eligible working families with qualifying children or other dependents (e.g., a spouse with disabilities) that receive care outside the home with a tax credit intended to partially offset the cost of that care. The federal government and some state governments offer CDCCs. To receive the federal CDCC, parents report care expenses, up to $3,000 per qualifying dependent or $6,000 per family, and receive a tax credit of 20-35% of that amount, depending on income1. The federal credit is nonrefundable; some state CDCCs are partially or fully refundable. Federal and state credit amounts vary by income and number of dependents in care. Eligibility rules also vary by state2.
What could this strategy improve?
Expected Benefits
Our evidence rating is based on the likelihood of achieving these outcomes:
Increased access to child care
Increased employment
Potential Benefits
Our evidence rating is not based on these outcomes, but these benefits may also be possible:
Increased academic achievement
What does the research say about effectiveness?
Establishing refundable child and dependent care tax credits (CDCC) is a suggested strategy to defray the cost of care for children and other dependents1, 3, and encourage work in low income families1. Available evidence suggests that the lowest income families rarely claim the nonrefundable federal credit, as their tax liability is not high enough to benefit from it; the federal credit is most often taken by middle and higher income families with larger tax liabilities4. A study of the 2003 expansion of the CDCC also suggests increasing the amount of expenses that qualify for the credit may increase spending on child care5. Additional evidence is needed to confirm effects and determine optimal tax structure and benefit amounts.
Early childhood experiences have a large impact on child development; increased access to higher quality child care could improve educational and financial outcomes among lower income families3.
A 2015 report projects that making the federal child and dependent care tax credit fully refundable, and increasing the percentage of costs reimbursed would reduce child poverty by 1% (146,500 children) and enable 101,000 parents to work, at a cost of approximately $1.6 billion6.
How could this strategy impact health disparities? This strategy is rated likely to decrease disparities.
Implementation Examples
As of 2018, 23 states and Washington, D.C. offer state dependent care tax credits. Credits in 11 states are partially or fully refundable2.
Implementation Resources
IRS-CDCC - Internal Revenue Service (IRS). Topic 602 - Child and Dependent Care Credit.
Footnotes
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1 TPC-Maag 2011 - Maag E, Rennane S, Steuerle CE. A reference manual for child tax benefits. Washington, D.C.: Urban-Brookings Tax Policy Center (TPC); 2011:Discussion Paper No. 32.
2 TCWF-State tax credits - Tax Credits for Working Families (TCWF). State tax credits.
3 NCCP-Hartig 2014 - Hartig S, Skinner C, Ekono M. Taxing the poor: State income tax policies make a big difference to working families. New York: National Center for Children in Poverty (NCCP); 2014.
4 Forry 2006 - Forry ND, Anderson EA. The Child and Dependent Care Tax Credit. Marriage & Family Review. 2008;39(1-2):159–76.
5 Miller 2015a - Miller BM, Mumford KJ. The salience of complex tax changes: Evidence from the child and dependent care credit expansion. National Tax Journal. 2015;68(3):477-510.
6 CDF 2015 - Ending child poverty now. Washington, D.C.: Children's Defense Fund (CDF); 2015.
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