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A Blog from New America's Early Education Initiative

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Obama's Tax Credit for Child Care and 3 Hypothetical Families

Published:  January 27, 2010
Issues:  
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For most working parents with young children, a big proportion of their household budget is dedicated to the cost of child care or preschool.  Enrolling a 4-year-old in a full-day childcare center costs, on average, between $4,000 and $12,000 a year, depending on where you live.   

That’s why President Obama’s proposal for making changes to the child care tax credit, released this week, could sound, at first blush, like a good deal for middle-class parents.  According to the official preview, the administration wants to "nearly double" the child and dependent care tax credit for families making under $85,000 a year.

But does that translate into dollars in the pocket? And what does it mean exactly?

To find out, we ran some numbers for three hypothetical families, following the instructions on this year’s Form 2441 and then comparing the current tax break to what is proposed. The result showed that the proposed credit increase could provide families with incomes over $43,000 up to $900 more than they currently receive in tax breaks. However, the tax credit is "non-refundable." That means that it only applies, if -- and it's a big if -- those families actually write a check to the IRS in their annual filings, instead of receiving a tax refund.  

About 6.5 million tax filers took advantage of this credit in 2007, according to the most recent data available in the IRS Data Book. But we don't know how many of them were low-income or middle-income families. To know whether this tax credit is truly valuable to middle class families, more analysis is needed.

But for now, let's look at how the credit works today:  Parents who want the tax break must document who is taking care of their kids and how much the care costs.  Uncle Sam essentially reimburses a percentage of parents’ childcare expenses up to a certain amount. (The percentage applies to up to $3,000 in expenses for one child and up to $6,000 for two or more children.) The exact tax credit is determined on a sliding scale by income.  The percentage covered by the credit drops to 20 percent for families making more than $43,000 in 2009.

The Obama administration, according to its fact sheet, has proposed increasing that rate to 35 percent for families with incomes up to $85,000 a year.  We wanted to determine what that would mean for three hypothetical families, each of whom has two children – an infant and a 4-year-old – who enroll in full-day child care programs.  As a proxy for the cost of their care, we used 2008 data from the National Association of Child Care Resource and Referral Agencies (NACCRRA), which publishes the average costs of child care tuition, state by state, each year.  Instead of picking one state's average, we opted to use the midpoint between the highest and lowest costs of full-day, center-based child care in the United States. That came to $10, 227 for infant care and $7,867 for 4-year-old care. In sum, it costs on average $18,094 a year to have two kids of these ages in full-day centers.

Under the current tax structure, here is how that looks on a family’s tax forms:

 

Under Current Tax Credit

 

 

 

Annual Family Income

$30,000

$50,000

$80,000

Avg. Cost of Child Care (1 infant)

$10,227

$10,227

$10,227

Avg. Cost of Child Care (4 year old)

$7,867

$7,867

$7,867

Total Child Care Costs for both kids

$18,094

$18,094

$18,094

Maximum Cost Available for Credit

$6,000

$6,000

$6,000

% of Max. Cost Taken

27%

20%

20%

Amount of Credit

$1,620

$1,200

$1,200

 

Here’s how it would change if Obama’s proposal was enacted:

Under Obama's Plan

 

 

 

Annual Family Income

$30,000

$50,000

$80,000

Avg. Cost of Child Care (1 infant)

$10,227

$10,227

$10,227

Avg. Cost of Child Care (4 year old)

$7,867

$7,867

$7,867

Total Child Care Costs for both kids

$18,094

$18,094

$18,094

Maximum Cost Available for Credit

$6,000

$6,000

$6,000

% of Max. Cost Taken

35%

35%

35%

Amount of Credit

$2,100

$2,100

$2,100

 
Instead of $1200, middle-income families would receive $2100. Remember, this is assuming that these families are writing checks to the I.R.S. instead of getting refunds. A crucial but missing piece of information is how many families at these income levels are actually liable to pay taxes.  It is highly unlikely, for example, that families with annual income of just $30,000 would be on the hook for any federal income taxes, and therefore, this tax credit would continue to be meaningless to them.

That means that these families may still be squeezed, since families of four with annual incomes of $30,000 or higher are typically not poor enough to qualify for Head Start (unless they qualify for other reasons, such as having foster children).

They may, however,  qualify for other government subsidies for preschool or childcare, depending on where they live. These subsidies typically come through the federal Child Care Development Fund.  (It’s not yet clear whether participation in a subsidized program would disqualify a family from the new tax credit.)

The President’s proposals do call for a $1.6 billion infusion of money for that fund – enough to serve 235,000 additional children, according to the administration.  This money is geared to families in poverty, and can be delivered two ways: either through voucher programs, in which states provide vouchers to qualifying families to spend on eligible child care centers, or through contracts with child care centers, who use the government subsidies to reduce tuition costs for low-income families.

We’ll be listening closely during Obama’s State of the Union speech tonight for any further details about these programs. The next question will be: Could these proposals be strengthened to help point families to high-quality programs, including child care centers that feature a pre-K or preschool component?

 

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