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 income (Urban-Maag 2011). 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 state (TCWF-State tax credits).

Expected Beneficial Outcomes (Rated)

  • Increased access to child care

  • Increased employment

Other Potential Beneficial Outcomes

  • Increased academic achievement

Evidence of Effectiveness

Establishing refundable child and dependent care tax credits (CDCC) is a suggested strategy to defray the cost of care for children and other dependents (NCCP-Hartig 2014, Urban-Maag 2011), and encourage work in low income families (Urban-Maag 2011). 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 liabilities (Forry 2006*). 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 care (Miller 2015a). 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 families (NCCP-Hartig 2014).

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 billion (CDF 2015).

Impact on Disparities

Likely to decrease disparities

Implementation Examples

As of 2018, 23 states and Washington DC offer state dependent care tax credits. Credits in 11 states are partially or fully refundable (TCWF-State tax credits).

Implementation Resources

IRS-CDCC - Internal Revenue Service (IRS). Topic 602 - Child and Dependent Care Credit.

Citations - Evidence

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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.

Urban-Maag 2011 - Maag E, Rennane S, Steuerle CE. A reference manual for child tax benefits. Washington, DC: Urban Institute; 2011:Discussion Paper No. 32.

Forry 2006* - Forry ND, Anderson EA. The Child and Dependent Care Tax Credit. Marriage & Family Review. 2008;39(1-2):159–76.

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.

CDF 2015 - Ending child poverty now. Washington, DC: Children's Defense Fund (CDF); 2015.

Citations - Implementation Examples

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TCWF-State tax credits - Tax Credits for Working Families (TCWF). State tax credits.

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