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A Look at Lower-Income Taxpayers and the Dependent Care Credit

Posted By Maxim Shvedov On May 30, 2014 @ 11:17 am In Public Policy Institute | No Comments

iStock_000016907156Medium [1]Caring for a child or an aging parent can be costly [2]. Caregivers working outside of the home may be able to offset some of these costs through the federal child and dependent care tax credit [3] (CDCC). In 2010, 6.3 million taxpayers claimed the CDCC, reducing their tax liability by about $3.4 billion. In all likelihood child care is a much larger slice of this pie, particularly given the requirement that the dependent must live with the taxpayer for at least six months. But as the population ages, the number of taxpayers caring for older adults with chronic care needs at home may increase.

CDCC could be quite helpful for lower-income caregivers, who spend [4] a larger share of income on caregiving than others — and the credit appears to be more generous for them. It offsets up to 35 percent of eligible expenses for taxpayers with adjusted gross income (AGI) below $15,000, but only 20 percent for those with AGI above $43,000.

With this in mind, one would expect to find a large number of low-income caregivers taking advantage of the CDCC. Are they?

Not really. Perhaps surprisingly, only a tiny fraction of low-income taxpayers claimed the CDCC: fewer than 20,000 out of 37 million taxpayers with income below $15,000. In contrast, nearly 2.9 million claimed it among 30 million upper-income taxpayers.

Tax Returns With Child and Dependent Care Credit by Income, 2010

AGI All filed returns
Child and dependent care credit
($ millions)
Under $15,000 37.6 *0.02 *1.8
$15,000- $75,000 75.2 3.43 1,807.0
$75,000 or more 30.1 2.90 1,588.8
All returns, total 142.9 6.34 3,397.6


* Estimate should be used with caution due to the small number of sample returns on which underlying IRS estimates [5] are based.

Why do lower-income caregivers miss out on a credit ostensibly tailored to benefit them the most? One of the reasons could be the interaction between CDCC rules and other parts of the tax code.

The CDCC is nonrefundable: If a taxpayer has no federal individual income tax liability — and many lower-income taxpayers do not — the credit offers no value. Nor does the CDCC offset other taxes typically paid by lower-income taxpayers, such as payroll or property taxes.

In addition, the CDCC’s income thresholds have never been adjusted for inflation, unlike many other parts of the tax code that do so automatically. In 1976, when the credit was first enacted, $15,000 was considered a solid middle-class income level. Today, it is barely enough to make ends meet.

As boomers age, the number of available caregivers is unlikely to keep up with demand [6]. In addition, many caregivers also face the challenge of funding their own retirement. Staying employed may be the single most important factor ensuring their retirement security down the road. A reformed CDCC could both support more caregivers and encourage them to stay employed.



portMAS [7]portMAS [7]portMAS [7]portMAS [7]portMAS [7] portMAS [8]portMAS [7] [9]About the author: Maxim Shvedov works on tax and budget issues as a member of the PPI Economics Team. He focuses on such areas as tax burden, fiscal sustainability, tax provisions for retirement and caregiving, and other issues of relevance for Americans over 50.

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URL to article: http://blog.aarp.org/2014/05/30/a-look-at-lower-income-taxpayers-and-the-dependent-care-credit-2/

URLs in this post:

[1] Image: http://blog.aarp.org/wp-content/uploads/2014/04/iStock_000016907156Medium.jpg

[2] costly: http://www.aarp.org/relationships/caregiving/info-07-2011/valuing-the-invaluable.html

[3] child and dependent care tax credit: http://www.irs.gov/uac/Publication-503,-Child-and-Dependent-Care-Expenses-1

[4] spend: http://www.caregiving.org/data/Evercare_NAC_CaregiverCostStudyFINAL20111907.pdf

[5] IRS estimates: http://www.irs.gov/file_source/PUP/taxstats/indtaxstats/10in33ar.xls

[6] demand: http://www.aarp.org/home-family/caregiving/info-08-2013/the-aging-of-the-baby-boom-and-the-growing-care-gap-AARP-ppi-ltc.html

[7] Image: http://blog.aarp.org/wp-content/uploads/2014/05/portMAS.bmp

[8] Image: http://blog.aarp.org/wp-content/uploads/2014/05/portMAS1.bmp

[9] Image: http://blog.aarp.org/wp-content/uploads/2014/05/blog1portraitPixMAS.jpg

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