Child-Care Tax Credits Can Help Families During the Coronavirus Pandemic

Pre-K teacher and her charges

By Gabrielle Pepin

June 12, 2020

The coronavirus pandemic has created child-care issues for many families. Since the onset of COVID-19, 48 states and the District of Columbia ordered or recommended school closures for the remainder of the 2019–2020 academic year. Whether schools will reopen in the fall and, if so, how they will operate are issues that remain largely uncertain as policymakers weigh possible health risks against the benefits of in-person instruction. If schools do not fully reopen in the fall, child-care costs will increase because parents will need to obtain care for their children during traditional school hours. The Child and Dependent Care Credit (CDCC), a tax credit based on income and child-care expenditures, may help families mitigate increased child-care costs due to the pandemic. 

The CDCC is a federal tax credit available to families with children younger than 13 years old, and about half of states supplement it with their own state child-care credits. To be eligible for benefits, all claimants, including both spouses among taxpayers filing jointly, must have positive annual earnings and be working or looking for work. While many families meet these criteria, the federal CDCC is nonrefundable, so only families with positive tax liability after other credits and deductions can benefit. Nonetheless, a number of states offer their own refundable CDCCs that can mitigate child-care costs for lower-income families.

Families that are eligible for the CDCC can claim up to $3,000 in child-care expenses per child for up to two children. Spending may include child care provided by anyone but the taxpayer’s spouse (if the taxpayer is married), another of the taxpayer’s dependents (such as an older sibling of the child), or the child’s parent. To claim the credit, taxpayers must list the child-care provider’s tax identification number or Social Security number on their tax forms. 

Taking into account both state and federal CDCCs as well as other aspects of the tax code, families with two or more children can receive between $1,640 and $3,080 per year in CDCC benefits depending on the state in which they live. These benefits are substantial: before the pandemic, I estimate that families with school-aged children who paid for child care spent about $6,000 per year on average.

In addition to transferring income to families with children, many of which face financial difficulties due to COVID-19, the CDCC encourages parents to remain in the labor force by decreasing their child-care costs and requiring that both spouses have positive annual earnings in order to receive benefits. Promoting work aids state and federal governments as well as individuals. For example, if the CDCC keeps parents in the labor force, it may prevent large reductions in family income that would decrease revenue from income and payroll taxes. The CDCC also could lessen reliance on safety net programs, which is particularly important as many states experience unprecedented surges in safety net participation during the pandemic. At the same time, researchers have shown that family income affects children’s academic achievement. Although children adapt to changes in learning environments, the CDCC may prevent decreases in family income that could hinder their performance in school.

Furthermore, the CDCC’s flexibility in terms of eligible child-care arrangements may prove especially beneficial during the coronavirus crisis. Informal child-care providers increasingly may supplant formal day-care centers, many of which closed because of the pandemic and may struggle to reopen, given decreased profits and the increased costs of safety protocols. Even if many daycare centers do manage to reopen, parents with concerns about sending their children to child-care programs that serve many children, where COVID-19 could spread quickly, may opt for informal providers who care for fewer children. Moreover, families may benefit from increased flexibility in child-care hours which informal caregivers may be better suited to provide. Families’ need for such flexible child-care schedules may become particularly acute during the pandemic as school districts consider implementing hybrid models of in-person and remote instruction, in which students would be in the classroom on some school days and at home on others.

In essence, the CDCC promotes work and can help families pay for increased child-care costs which will arise if schools do not fully reopen in the fall. The CDCC may even help create jobs within the child-care sector during a period of high unemployment. Because families can claim both formal and informal child-care spending, the CDCC also may address an increased need for flexible child-care schedules while alleviating concerns about increasing children’s risk of exposure to COVID-19.

Gabrielle Pepin is a postdoctoral researcher at the Upjohn Institute.

Experts

Gabrielle Pepin headshot

Gabrielle Pepin

Postdoctoral Researcher

Research Topics: Work & Family Balance