Child and Dependent Care Tax Provisions and Employer Tax Provisions

Amy Matsui, Senior Counsel National Women’s Law Center [email protected]

(202) 588-7615

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 $2,100 .

28

states offer child care tax provisions, ranging in maximum value from $2,310 $144 .

to

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

credits (

14

states have

refundable

are tax 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: www.nwlc.org/details.cfm?id=2699§io 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

$500) : credit is doubled for nationally accredited programs approved by Maine DHHS (50% of federal credit, or up to $1,050, refundable up to –

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 $2,100 -- $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 ( file a separate form.

not

the 1040 EZ) AND • 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 www.nwlc.org/pdf/TheLittleEngine2002.pdf

. – In FY 2001,

only two out of over 60,000

corporate tax filers claimed the Mississippi employer credit.

For more information

• www.nwlc.org/details.cfm?id=2699§io n=childcare • • www.nwlc.org/pdf/stateprovisions2007.pdf

www.nwlc.org/pdf/TheLittleEngine2002.pdf

• www.nwlc.org/display.cfm?section=tax • Or contact me at [email protected]