The Washington debate of tax reform is in the process of confusing and potential combining two separate and significant tax credits, the Child Tax Credit and the Child and Dependent Care Tax Credit. The first one is provided to parents with a child under 17. The second is a long time established and important tax credit targeted to parents that have child care and dependent care expenses.
Both are credits which means it applies after a tax filer has determined their tax payment owed the federal government and it reduces that tax payment by the amount of the credit. A tax deduction simply reduces taxable income and then a tax calculation is made based on remaining income.
At one-time, Presidential daughter Ivanka Trump championed the child care credit as one of her priorities but since the unveiling of the Republican tax plan—a plan that was limited to broad outlines— it has been written that she is promoting the child credit which was listed in the outline, the child care credit was not mentioned.
The child care credit under its name, the Child and Dependent Care Tax Credit (CDCTC) is a tax credit that helps working families pay expenses for the care of children or adult dependents including spouses. Families can claim up to $3,000 in dependent care expenses for one child/dependent and $6,000 for two children/dependents per year. The credit is worth between 20 percent to 35 percent of expenses on a sliding scale tied to the family income. Families with adjusted gross income (AGI) of $15,000 can claim 35 percent of expenses for a maximum credit of $2,100. The percentage of expenses claimed decreases as income rises with families at $43,000 or more reach the minimum claim rate of 20 percent qualifying for a maximum credit of $1,200.
The credit has been an important supplement to middle and lower income families in addressing their child care needs. This is especially true considering stagnant and eroding federal support for child care subsidies.
The Child Tax Credit was created during the Clinton Administration and started as a credit worth $500 for each of the first two children under the age of 17. Now it is worth up to $1,000 per eligible child. The CTC includes a partially refundable benefit which means that you can receive the refund even if all your federal income tax has been wiped out through deductions. The credit is limited and phases out. The phase-out varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. The child tax credit is reduced by $50 for each $1,000 of your excess income over this threshold. For example, if you qualify for head of household filing status and you earn $76,000, your child tax credit would drop to $950.
The Republican plan, so far would eliminate most deductions but would leave the Child Tax Credit. Presumably this would be increased to offset the loss of all the other deductions. That won’t be clear until there is greater detail and specifics. If the child care tax credit (CDCTC) is eliminated it would undercut those lower and middle-income families that are heavily dependent on child care. If eliminated, it could make parents with high child care costs one of the losers in tax reform.