One of the most significant costs a low-income family with children faces is child care. To help offset child care costs, the federal Child and Dependent Care (CADC) Credit can be claimed for up to $2,100 off of federal taxes. However, it is not refundable. Thus poor families with no federal tax liability get no benefit. [1]
States can provide relief to low-wage families with expenses for child care or the care of other family members. A state tax credit can help ensure that children and other family members receive quality care, while reducing the financial burden for low-wage families.
In 2006, the credit provided $3.5 billion in child care assistance to 6.5 million families.[2]
What Can Policymakers Do?
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Expand outreach to eligible families.
To ensure that all eligible families claim this credit, and bring federal revenues in-state, policymakers can employ low-cost outreach measures in concert with those used for the Earned income Tax Credit. In addition, a specific CADC outreach toolkit is also available.
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Establish State Child and Dependent Care Credit.
State policymakers can help reduce tax burden and offset the costs of child care for poor working families by establishing a state Child and Dependent Care Credit.
Listed below are the 28 state that currently have a child and dependent care tax credit. The value of these polices range from a $285 deduction in Maryland to the $2,300 tax credit available in New York. As with other tax credits, the impact is greater when states make them refundable. States in bold have a refundable credit.[3]
States with a CADC Tax Credit
(Bold type denotes a refundable Credit)
[1]
Justin Bryan, Individual Income Tax Returns, 2006 (Washington DC: IRS, Fall 2008).
[2]
Justin Bryan, Individual Income Tax Returns, 2006 (Washington DC: IRS, Fall 2008).