Child and Dependent Care Tax Provisions and Employer Tax Provisions Amy Matsui, Senior Counsel National Women’s Law Center (202)

Some Tax Policies Focused on Child Care…. Child and dependent care tax credits and deductions Flexible spending accounts Employer tax credits and deductions

Child and dependent care tax provisions Can help families meet their child care expenses. The federal Child and Dependent Care Tax Credit can be worth up to $2, states offer child care tax provisions, ranging in maximum value from $2,310 to $144.

How much help can tax credits provide to working families with child care expenses? In 2004, almost 6.5 million families received more than $3.3 billion from the federal Child and Dependent Care Tax Credit. More than 2.7 million tax filers in 27 states received over $687 million in state child care tax benefits in the most recent year for which data is available.

Quick Review: Tax Credits Counts against taxes owed. –If a family owes $1,000 in taxes but has a $600 tax credit, their remaining tax liability will be $400. If a tax credit is refundable, the taxpayer may be able to receive money back. –If a family owes no taxes but has a $600 refundable tax credit, they will receive a refund of $600. –But if the family owes no taxes and has a $600 nonrefundable credit, their nonrefundable credit is of no benefit to them.

Are the child and dependent care tax provisions refundable or nonrefundable? The federal Child and Dependent Care Tax Credit is not refundable. 14 of the 28 state child care tax credits are refundable.

The Federal Child and Dependent Care Tax Credit Families can claim up to $6,000 in care expenses for two or more children or dependents ($3,000 for one child or dependent). Depending on income, a family receives a percentage of qualifying care expenses, for a maximum of $2,100 for two children or dependents and $1,050 for one child or dependent. The family applies the credit against its tax liability.

What kind of child care qualifies for the federal Child and Dependent Care Credit? ANY kind – center, family day care home, church, or by a neighbor or relative – qualifies. BUT the care must be employment-related – the adults in the family must use the care so that they can work or look for work.

State Child and Dependent Care Tax Provisions 33 states have child care tax provisions, of which 5 are tax deductions and 28 are tax credits (14 states have refundable credits): –AK, CA, CO, DE, DC, GA, HI, ID, IA, KS, KY, LA, ME, MD, MA, MN, MT, NE, NM, NY, NC, OH, OK, OR, RI, SC, VT, and VA. For more information: n=childcare. n=childcare

Child Care Tax Credits and Quality The federal Child and Dependent Care Tax Credit only requires that facilities caring for six or more children comply with state and local laws. Several state credits do target quality: –Maine: credit is doubled for nationally accredited programs approved by Maine DHHS (50% of federal credit, or up to $1,050, refundable up to $500) –Vermont: separate refundable credit requires care to be provided by nationally accredited/3-star or higher QRS-rated provider; only available to low-income families (50% of federal credit) –Arkansas: credit is refundable for care provided to children 5 and under in state-accredited or NAEYC/NAFCC-accredited programs (20% of federal credit, or up to $420) –Louisiana: New credit is a percentage of existing child care credit, with percentage based on QRS rating for facilities rated 2 stars and higher (5- star provider qualifies taxpayer for credit worth 200% of their LA child care credit, or up to $2, $3,150 combined). Credit is refundable for families with federal AGI of $25,000 or less.

These child and dependent care credits are great! How do families get them? To claim the federal credit, a family must file the IRS form 1040 or 1040A (not the 1040 EZ) AND file a separate form. Individual state tax provisions are claimed on state tax forms.

Flexible Spending Plans Employers can offer a flexible spending (cafeteria) plan for dependent care benefits. –Employees can put in up to $5,000 in pre-tax dollars for care for one or more dependents. –Alternatively, employers can provide up to $5,000 each year in child and dependent care benefits.

Flexible Spending Plans, cont’d Flexible spending plans have tax advantages. –The employer does not pay unemployment taxes on the benefits. –Neither the employer nor the employee pays payroll taxes on the benefits. –In most states, these benefits are not subject to state income taxes. BUT an employee can’t double-count funds from a flexible spending account to claim child and dependent care tax credits.

Employer Tax Credits for Child Care Intended to encourage businesses to invest in child care by: –Building child care facilities for employees to use –Paying child care facilities for employees’ child care expenses –Paying other related expenses (like resource and referral fees)

The Federal Employer Credit Equal to –25 percent of an employer’s costs of Acquiring, constructing, rehabilitating, or expanding a child care facility; Operating a child care facility; Contracting with a third-party child care provider; OR –10 percent of costs of providing child care resource and referral services to employees. Annual limit of $150,000 per employer.

State Employer Credits For tax year 2007, 22 states offer employer tax credits: AK, CA, CO, CT, FL, GA, IL, KS, ME, MD, MS, MT, NJ, NM, OH, OK, OR, PA, RI, SC, TN and VA. Beginning in tax year 2008, Louisiana will offer an employer tax credit (part of which encourages the use of quality care).

Example Mississippi offers a credit of 50% of costs of –Start-up or construction –operating a child care center –purchasing child care for employees –Offering subsidies or vouchers to employees –Resource and referral costs No limit on the value of the credit.

Unfortunately…. The employer tax credits for child care are underutilized. –The federal employer tax credit was estimated to cost about $10 M in 2005 and 2006 (in comparison, the federal work opportunity credit cost about $210 M in 2006). –A 2002 NWLC study found that of 20 states, 16 had five or fewer claimants, and 5 states had no claimants at all. See –In FY 2001, only two out of over 60,000 corporate tax filers claimed the Mississippi employer credit.

For more information n=childcarewww.nwlc.org/details.cfm?id=2699&sectio n=childcare Or contact me at