Child and Dependent Care Tax Provisions and Employer Tax Provisions

1. Child and Dependent Care Tax Provisions and Employer Tax Provisions Amy Matsui, Senior Counsel National Women’s Law Center amatsui@nwlc.org (202) 588-7615

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

3. 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 to $144.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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: www.nwlc.org/details.cfm?id=2699&section=childcare.

10. 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 $2,100 -- $3,150 combined).  Credit is refundable for families with federal AGI of $25,000 or less.

11. 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.

12. 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.

13. 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.

14. 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)

15. 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.

16. 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).

17. 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.

18. 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.

19. For more information • www.nwlc.org/details.cfm?id=2699&section=childcare • www.nwlc.org/pdf/stateprovisions2007.pdf • www.nwlc.org/pdf/TheLittleEngine2002.pdf • www.nwlc.org/display.cfm?section=tax • Or contact me at amatsui@nwlc.org