Bipartisan Effort Would Enhance Child Care Tax Credits

Senators Tim Kaine (D-VA) and Katie Britt (R-AL) introduced a pair of bills aimed making child care more accessible and affordable, including one focused on tax credits available to families and employers — setting up the conversation for tax reform in 2025.

Kaine and Britt’s Child Care Availability and Affordability Act (S. 4874), the tax-focused bill, would enhance three existing tax provisions: the Employer-Provided Child Care Tax Credit, Dependent Care Assistance Program, and the Child and Dependent Care Tax Credit.

Employer-Provided Child Care Tax Credit.

The bill would revamp the credit under Code Sec. 45F available to employers that provide child care assistance to their employees. The current credit is capped at $150,000 per year and is available for 25% of the costs the employer expends on acquiring, constructing, rehabilitating, expanding, or operating a qualified child care facility or under a contract with a qualified child care facility.

The bill would generally increase the maximum credit to $500,000 and the percent of covered expenses from to 50%. For small businesses — defined as those that meet the “gross receipts test” under Code Sec. 448(c) for a five-year period — the bill would establish an even more generous credit maximum of $600,000 and 60% of covered expenses. And it would allow businesses to pool resources to own or operate a child care facility for their employees.

Brian Gutman, Director of Government Relations at Learning Care Group — which operates nearly 1,100 child care and preschool facilities in 39 states — told Checkpoint these changes are important, because “it’s no longer just large employers who are looking to put a facility on site.” He added that “child care benefits are attractive to businesses large and small,” but “affording those benefits can be a real challenge.” Increasing the maximum credit to 50% of costs, and 60% for small employers, will help businesses “offer their employees the types of benefits that they need,” said Gutman, adding that child care “is very much a workforce issue.”

Dependent Care Assistance Program.

The bill also would increase the maximum deductible amount under Code Sec. 129‘s Dependent Care Assistance Program. That program allows payments made by an employer for an employee’s dependent care assistance to be excluded from the employee’s gross income.

The current exclusion is generally limited to $5,000 (or $2,500 for married individuals filing separately), or the employee or employee’s spouse’s earned income. Kaine and Britt propose to allow families to deduct up to $7,500 in expenses.

Gutman explained that the provision has not been updated in decades, meanwhile “everything’s gotten more expensive, including child care.” He noted that the original $5,000 threshold in DCAP was based on the average annual cost of infant care across the country, which now has “nearly tripled.”

Child and Dependent Care Tax Credit (DCAP).

Finally, the bill would enhance the individual tax credit for household and dependent care expenditures to allow a taxpayer to be gainfully employed. The bill would repeal the current credit under Code Sec. 21 and replace it with a revamped credit under new Code Sec. 36C.

The new provision would allow taxpayers to claim a credit of up to $2,500 for families with one “qualifying individual” — defined to include dependents under age 13 — and $4,000 for families with two or more. Taxpayers could claim as much as 50% of employment-related care expenses — reduced percentages apply for taxpayers with higher incomes. The bill also would make the credit refundable to better assist low-income families with out-of-pocket care expenses.

Under current Code Sec. 21, individual taxpayers may take a credit equal to 20% to 35% of the expenses they pay for the care of a qualifying individual so that the taxpayer can be employed. The current maximum credit per tax year is $1,050 for taxpayers with one qualifying individual and $2,100 if there are two or more.

The bigger tax conversation.

Gutman told Checkpoint that “there’s a really important conversation happening right now around how do we utilize the Tax Code to help more families afford quality child care. And that’s really what this bill is after. So I look at I look at this bill within kind of that broader context.”

“This should be a bipartisan issue and historically it has been,” said Gutman. He noted that there are “several other pieces of legislation that touch on one or more of these three priorities.” And this bill updates all three provisions “so that they are more applicable in current times.”

“All three of these credits really stand to benefit middle income working families … who typically are not eligible for subsidized child care,” said Gutman. “Stacked together, they really provide that opportunity to lower costs a bit for middle income families so that they can afford high quality child care that they need in order to participate in the workforce.”

For more on the credit for child and dependent care expenses, see Checkpoint’s Federal Tax Coordinator ¶ A-4300 et seq.

For more on employer-provided assistance under the Dependent Care Assistance Program, see ¶ H-1400 et seq.

For more on the Employer-Provided Child Care Tax Credit, see ¶ L-17870 et seq.