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A lack of available child care could cost the U.S. economy up to $329 billion over the next decade, according to a 2025 Bipartisan Policy Center report.
One untapped way for families and businesses that employ them to save on these costs may be through existing tax breaks, according to a new report from the U.S. Congressional Joint Economic Committee (Minority).
According to the report, only 13% of private sector workers have access to child care benefits through their employer. Additionally, existing child care tax incentives are underutilized or difficult for businesses and their employees to use, the report said.
Tax incentives to reduce childcare costs
Eligible workers may be able to offset child care costs by claiming the Child and Dependent Care Tax Credit (CDCTC).
The CDCTC allows families that meet certain criteria to offset a portion of their child care and dependent care costs against their federal income tax liability. This credit can offset a portion of the cost of care up to $3,000 for an eligible individual and up to $6,000 for two or more eligible individuals.
However, only about 12% of taxpayers with children claim this credit, according to the report. Some eligible workers may not claim the credit because they have difficulty accessing it, while others may be ineligible because they don’t have qualifying expenses, don’t pay federal taxes, or earn too much, the report said.
Companies may set up Dependent Care Assistance Program (DCAP) accounts for their employees. These accounts allow families to set aside up to $7,500 of their pre-tax income toward child care expenses. That money is not subject to taxes as long as it is used for child care or other qualified expenses. The report says fewer than half of private sector employees have access to these accounts.
A DCAP, also known as a dependent care FSA, is an “immediate tax savings,” says Sean Robison, a certified financial planner, CPA, and founder of Purpose Built, an independent financial planning firm in Moorestown, New Jersey.
For high-income earners, protecting a portion of their income could be especially helpful, he said. But it’s important to remember that this is a “spend it or lose it” account, according to Lovison. This means the balance must be used for qualifying expenses, such as preschool or summer day camp, during the plan year. And it’s important to remember that there are exceptions, such as sleepaway camps, he says.
A separate employer-provided tax credit known as 45F helps businesses offset the cost of providing child care. Businesses that invest in childcare for their employees, either by building and operating a childcare facility or partnering with a childcare provider, can deduct 40% (50% for small businesses) of eligible expenses from their tax liability. This allows you to save up to $500,000 annually through non-refundable credits, and up to $600,000 for small businesses.
Despite these savings, less than 1% of companies filed using the 45F program, according to the report, which cited the latest available tax filing data for 2016.
The report’s example scenario shows that by taking full advantage of childcare-related tax benefits, the hypothetical company could save $820,000 in taxes over five years and generate more than $8 million in investment returns through lower employee turnover and increased productivity. Meanwhile, parents employed by the business could potentially save nearly $10,000 over five years.
The report comes months after the committee’s ranking member, Democratic Sen. Maggie Hassan of New Hampshire, along with Republican Sen. Dan Sullivan of Alaska, proposed legislation that would create a Corporate Child Care Officer at the IRS to educate businesses about existing child care tax benefits.
