Find us on Google+

The Child and Dependent Care Credit Sucks (Or How You Can Tell That Congress is Full of Men)

May 7, 2008 · 23 comments

I spent the better part of the day working on my personal taxes (I know, I know). We’re on an extension – we’re always on extension.

The thing about doing my own taxes is that it reminds me of all of the stupid tax rules out there – you know, the ones that were either not thought out well or were clearly the result of some pandering by somebody. It is also a constant reminder that women don’t make the rules…

You see, one of the credits that you may be able to claim on your personal income taxes is the Child and Dependent Care Credit. This is, ostensibly, a good thing. But it rarely works out as good as it sounds.

If you pay someone to watch your qualifying child or dependent (generally, a child under age 13) while you work or look for work, you can, in theory claim the Child and Dependent Care Credit. The credit is not a straightforward deduction – it is rather a percentage of the amount of expenses actually paid for care. The amount claimed can be up to 35% of your child care expenses, depending upon your income.

Sounds great, right? Not really. First things first. Full-time day care for a 2 year old child costs, on average, $611 per month – or just under $7,500 per year per child. In metropolitan areas, it tends to run closer to $1,000 per month – or more than $10,000 per year per child. (source: Runzheimer International)

As the mother of three children, this means that if I work full time outside of the home (which I used to do), I can expect to spend about $30,000 on child care. Let’s assume that I make $50,000 – higher than the median income in the US. My entire after tax salary will go towards paying for child care. My tax credit, however, is limited to $6,000 for child care expenses. That’s because, for 2007, the cap is $3,000 for one child or $6,000 for two or more children.

That math puts into perspective the argument of staying at home versus working a little bit more, no? It’s not always a simple calculation.

The amount that you can claim decreases as your wages increase. This is an interesting concept because, at least theoretically, higher wage earners tend to require more hours of child care than lower wage earners. In other words, if I am working at a Center City law firm – 60 hours per week to meet my billables – I will make more money, sure, but I will spend more because my child will require more hours of care. However, on my taxes, I will receive a smaller percentage benefit for child expenses.

How much smaller? For qualifying income of $40,000 or more, the credit is 20% of the amount of expenses actually paid up to the cap. Using $50,000, that means that I could claim up to the smaller of $10,000 (20% of $50,000) or $6,000 (the statutory cap) – in other words, $6,000 even though my expenses were closer to $30,000.

So, it sucks for higher wage earners on a purely tax/economic scale but it should work out well for lower wage earners, right? Nope. This credit gets you coming and going. There is a requirement that the income used to calculate the credit is the lowest income as between you and your spouse, not an aggregate. In most – but not all – cases, this means that you calculate the credit based on the woman’s income.

Let’s look at it from the other end. If you work part time, then, and earn, say $15,000, the maximum credit that you could claim for two or more children would be $5,250 (35% of $15,000 since the rate is higher for lower wage earners) – even though you still likely spent close to your entire wages on child care.

And if you freelance or own your own business? Potentially disastrous. Qualifying income must be from wages or salaries or net earnings from self-employment. That’s right, net. Whereas I get to include my gross income from wages, I must include my net income from my business.

And this is why I’m annoyed this tax year. I lost money on my business. Not a lot but enough to put me into the red. The result? A big fat 0 in the child and dependent care credit column despite the fact that I needed child care so that I could manage my business. It doesn’t exactly reward entrepreneurs, does it?

So, if those taxpayers who make a lot of money don’t benefit – and those who find it difficult to pay for child care don’t benefit – who exactly benefits from the child tax credit? Ironically, based on pure economics, it’s someone who doesn’t need the credit at all: a taxpayer who works for wages (ideally, issued a W-2) and whose spouse makes enough money to pay for child care out of his or her salary. Maximum economic benefit – and it makes no sense.

What kind of policy are we pushing here? The clear policy message that we’re sending – mostly for mothers – is “stay at home” unless you marry well. As far as I’m concerned, staying at home should be an option that parents discuss based on their own beliefs and circumstances – not a tax policy decision but I’d love to hear what you think.

(Image source: Chris Erb)

{ 19 comments… read them below or add one }

1 Kelvin Kao May 8, 2008 at 12:39 am

This reminds me of financial aid in schools, how sometimes rich people don’t care about paying, poor people get financial aid, and those who are stuck in the middle just end up struggling to pay for college because they have to give most of their money to schools. A lot of times rules just tend to focus on extremes because the middle is harder to define and generalize.

2 Pat D May 8, 2008 at 6:57 am

Come on Taxgirl, put on your big girl panties.

When you had your children, you assumed one of the most important and rewarding jobs in the world: that of being a parent. Being a parent trumps careers, trumps what you think will make you happy. My mom busted her rear to raise my sister and I in a world alot more hostile to working women than you can imagine. High school educated, she WORKED her way up to become the head of purchasing. No child support. No child care credit. No alimony. She did not have her career dreams susidized by anyone. Yet she played the cards that were dealt her. We grew up in a happy environment. We never owned a home, but we did have a mother who loved us. We took great comfort knowing that Mom would take care of us. She made sure that we were not welfare kids. She did not want us dependent on others. All we had to do was look around and see what happens to people when they live off the government. Her experiences left her strong, yet warm and sensitive. Do not sell yourself short. 80% of your potential is dependent upon what YOU do. The other 20% you cannot control, so just deal with it as it comes. Stop waiting for other people to solve your problems, it takes to long if it happens at all. The best action is to stop sitting on your brains blaming others and go do what needs to be done. Once you figure it is not all about you, that is when the happiness comes. Stop moping; go and embrace life.

3 Kelly May 8, 2008 at 7:16 am

Pat,

Thanks for your comment.

To be clear, I am thankful for my children and my family. I choose to structure my life so that I can enjoy my children and still (hopefully) be a good role model for them.

I am fortunate that this child care credit – or the lack thereof – won’t change my life. That still doesn’t mean that I don’t think it’s bad tax policy. I think it’s very bad tax policy.

Tax policy is a mix of incentives and disincentives. I happen to believe that if we have a made the decision to create incentives, they should be incentives that make good economic sense. I don’t believe that this one does.

And P.S. I do embrace life – if you met me in “real life”, you’d see that in a heart beat!

4 Jess May 8, 2008 at 7:35 am

I find the child tax credit a bit of a joke myself. In all the years I paid daycare the tax credit made little or no difference to us. When you are paying out over 7K a year for 1 child, getting less than half back in a credit really does not make you jump for joy. I am thankful that starting this year I no longer have to pay for daycare, all of my children are now in school full time, and we do not have to even think about that poor excuse for a tax credit.

5 Death & Taxes May 8, 2008 at 8:09 am

You might rescue some of the credit by using the nonfarm optional method on Sch SE. My old Philly tax lawyer boss showed me that years ago. Then too, if family income is below certain levels, your loss might qualify you for a spousal IRA deduction.

I mention this because of the crazy quilt of laws we work under. I’m at the other end of the age continuum, and last year married the beautiful Pam, 61 and collecting widow’s Social Security. Now 85% of that income is taxed on our return because of lines drawn in the sand during the first year of the Reagan era, and expanded in the first year of the Clinton regime. 32K of income in 1981 is not 32K of income today, just as the amounts for the child care credit were set once in antediluvian times and only adjusted once.

Good lord, TRA86 eliminated the two earner deduction that eased the tax pain for the working couple. I have fond memories of Sch W. And pre-Reagan Unemployment had to exceed certain levels before it was taxed…..anyone remember Sick Pay?

All these little thoughts show the impossibility of living in a world with a static Tax Code (when was the last time you saw Sch R?)…..I don’t think it is so much ‘men’ as that old adage of Mr. Dylan, “money screams.”

6 Mike Piper May 8, 2008 at 11:23 am

I have to say, I’m not a fan of the credit existing at all. The idea of subsidizing having kids seems like a poor plan to me. (I’m also pretty strongly against exemptions for dependent children, as you might imagine.)

That said, I agree that it’s implementation is terribly unfair to certain parties (such as business owners).

7 Urbie May 8, 2008 at 1:58 pm

Hi, Kelly –

Not to pile on or anything (I love your blog, don’t get me wrong), but I have to echo Pat’s and Mike’s comments. My wife and I have no kids, which was by choice. Yet we pay thousands of dollars a year in taxes that support public services for other people’s kids (no need to detail these; you know what they are). I have no problem with shouldering my fair share of social costs, and all that — but it always seems as though every time Congress makes or changes a law, it’s always in the direction of making child-free adults pay more and giving parents more tax breaks. “It’s for the children” is getting tiresome. Sure, I have more disposable income than I’d have if we had kids — but again, that’s a choice.

But yeah — I agree with the basic point of your post: the child-care credit is very badly written. But since when do tax laws make sense?!? :-D

Urbie

8 Keith May 8, 2008 at 5:26 pm

Just another way for the government to decide how much of our own hard earned money each of us need to live on.

9 Velveteen Mind - Megan May 9, 2008 at 8:06 am

Okay, this post is what I needed for that interview yesterday with NBC Nightly News. I was trying to explain why we decided that, for now, it is more beneficial across the board for me to stay home, but I didn’t have clear numbers to offer.

Grrrrrrr.

10 Gordon May 9, 2008 at 12:40 pm

It sounds to me like you want the government to pay for your child care.

Here’s one thing I can guarantee. The day the government increases the Child Care Credit you’ll see an increase in the Day Care prices almost proportionate.

The same thing happens with student loans. The feds increase the programs, schools see an opportunity to jack up tuition.

I have a client who earned $90,000 last year and paid no federal income tax; yet another had a liability of $8,0000, is it fair to have that disparity based on life choices?

11 Jessie October 21, 2008 at 2:21 pm

So, I see a lot of you out there disagree with the child tax credit and moan and complain about paying taxes that you think go to supporting parents who want to work. Do you also disagree that this country should support the unemployed? I mean, based on your comments why should we support someone whoe gives nothing or who pays no taxes. You are essentially supporting people who chose not to work. Some people lose their jobs due to the company failing and is not a choice by them. What about disability? Do you also disagree that you should not pay taxes to support people who cannot work and who have children? Would you prefer they starve and their children die due to neglect? While I agree to some extent that people should be able to afford the kids they have I also agree whole heartedly that they should be given some kind of relief for the daycare expense they are forced to pay so that they can work and contribute to the taxes of this country. If it wasn’t for the government raising interest rates/housing and making things so much more expensive both parents may not have to work in order to keep food on the table. It’s a long time since the ideal 50′s where the dad earned enough for all and the mother could stay home with the kids. This country needs to wake up to that. In addition these children are the future of this country and do you expect the government to ignore the future of this country? I must admit though that I do agree the place is full of men because the plan is absolutely retarded. I would love to see them survive on the maximum wage they have crated and the maximum credit. Let’s see them try.

12 Jessie October 21, 2008 at 2:28 pm

Just to add……….I think this is the worst country I have lived in for child allowances. In Europe ( a place where Americans consider inferior to them) gives up to 2 years sometimes for maternity leave (in comparison to the meager 6 weeks here….and even then it’s a hassle to get those 6 meager weeks). Imagine having to give your 6 week old little baby to a stranger while you have to go out to work? And a tax free child allowance is given EVERY month for EACH child in a household regardless of how much you make. This is not something claimed by spongers but is given automatically once the child is born and is every month up until they’re 18. What a great way to ensure the future of your country and what a great way to give many parents the ability and more importantly, the choice to stay home and care for their children instead of having to dump them off at a mass daycare with no one on one care and attention.

13 magpie October 21, 2008 at 3:02 pm

Right – and if you’re lucky enough to have a dependent care flex account, you’re limited to $5K.

14 Deborah Beckett January 8, 2009 at 6:14 am

IMO the real purpose of the child care tax credit is to force home-based care providers to declare their income to the IRS and pay taxes. The credit is not enough to help working parents in a meaningful way or even to “encourage working”. But it’s enough that the working parents are not going to pass it up. To claim it, they must submit the care provider’s SSN on their tax return (or identify the care provider by name and indicate that the provider refused to give the SSN). Either way a care provider that does not declare the income is going to be in hot water with the IRS.

Prior to this credit, most home-based care providers could earn $20-40K/year or more under the table. Not only not paying taxes on it, but also maintaining eligibility for assistance like food stamps, WIC, earned income credit, medicaid, etc. So it’s a bigger issue than just making sure the IRS gets its due.

15 Robert February 12, 2009 at 4:39 pm

First off, to those tired of “supporting” other people’s children, get over it! We are part of a society and part of a society’s responsibilities is to prepare the next generation of citizens. This includes education, parks, and supporting parent friendly programs. I’d like to see where the country would be in 30 years if everyone decided to stop having children. For an small example, look to Japan’s stalled economy over the last 20 years. Just because you have decided not to take on the sacrifice of having children of your own, doesn’t mean you don’t have a responsibility to the future of this country.

And you claim we want Uncle Sam to pay for our child care, but you are dead wrong. I have no problem paying for child care, but why should we have to pay taxes on the amount we have to pay? It’s not like this is a luxury we are trying to deduct here. Really it’s a business expense, because we have to pay for child care in order to go to work! We are just trying to make ends meet here.

We pay about $16,500/year to have just 2 kids in daycare. My wife makes about $32,000/year. So over half of her gross pay goes to daycare. Take out taxes and it’s about $26,000/year or $2166/month even with the tax credit allowance. Then take out daycare and it’s $9500/year or $792/month to take home. It’s not much, but we need it.

And remember people, we don’t get $6000, we only get a percentage of that, around $1500, deducted from our taxes. I/12t isn’t free money from the government!

Basically, my wife works hard 40 hours a week to bring home $800/month after taxes and child care. If we could deduct the entire $16,500 instead of just $6000, we could keep another $200/month. We aren’t looking for a handout, just to keep a little more of our hard earned money. Stop taxing child care!

P.S. To magpie: If you have a dependent care flex account, you can still take the credit, but you have to subract the $5000 you contibuted tax free to the account from the $6000, meaning you can claim a $1000 allowance for the credit. I don’t know why they just don’t allow you to contribute $6000 to the account! That’s Congress and the IRS for you!

16 Vicky February 18, 2011 at 5:43 am

You can tell that the people behind this, have very little sense of reality when it comes to childcare. And the truth is that, women suffer the most of all the headache caused by this clause.

I’m on the other end of the income. Made under 13000 in 2009, and under 14000, in 2010. I am not on any kind of welfare program. In 2009, I was out of a job for 3 months. I lived off my savings and having no other family here, I had to pay a lot for childcare so I could look for work. I finally found one, part time. It required a lot of driving and we were reimbursed mileage and time. I don’t have to tell you what that can do to your car, beside which they made me carry more auto insurance coverage than I wanted or needed. During the holidays, I was employed as a casual worker at USPS. Didn’t get paid for the 3-4 weeks that we worked until the next year 2010. I almost had a heart attack when I found out that all my efforts were in vain. Bottom line: I did not make enough money. I spent more money for childcare than I earned at the part time job I got for the remaining 9 months of the year. We all know what 2010 was like in the job market. Even getting a full time job , the last 2 months of the year did not help. It killed me to have the taxes taken off from my check, but it still did not help.

What exactly are we supposed to do? Is there a way to show these people in congress that something needs to be done. Whether the care is private or daycare center, etc. it is still money paid, expenses accrued. High income or low income, there’s no win. Taxgirl’s right. We struggled to use the little we had to keep the economy moving. We patronized those business so we wouldn’t have to ask for help from Uncle Sam and, in my case Uncle Ricky.These business paid taxes to the government. Something needs to be done. If there is a movement or petition addressing this issue, please let me know. Right now I’m feeling too sick to the stomach again because of this.

17 Brittany January 11, 2012 at 2:55 pm

I moved from Colorado to the East coast (Philadelphia) this past year for a “better job”. I was making $30,000 in Colorado, and now I make just over $45,000. The issue, of course, is that NOW I am taxed almost 5% of my gross income by Philadelphia and Pennsylvania.

I knew about the higher taxes before my move. I also knew that I would have higher expenses here on the East coast. As a single mom, I spend almost $10,000 a year here for child care (almost DOUBLE what I spent in Colorado). Still, I didn’t think too much of it – especially since I believed the child care credit would help curb those expenses.

But no, those deductible expenses are capped at $3,000. It isn’t just the Dependent Care Credit. I don’t even qualify for the Earned Income Credit that my income would’ve allowed me to claim in Colorado.

Since $3,000 is the cap on deductible expenses for the Dependent Care Credit, coupled with the lower cost of living and taxation in Colorado, moving here was -scarily- a poor financial decision.

I made this move with the intent of raising my (and my daughter’s) standard of living. In this country, we are taught that working hard and making honest money would be rewarded. It is sad and frustrating to find yourself in a situation where you find yourself making 50% more money and subsequently finding out that those extra hours spent at the office didn’t benefit your wallet.

WHY does the government cap those deductible expenses at such a LOW number? I don’t want a handout, but come on – this benefits nobody. I agree with taxgirl. It doesn’t benefit the lower-class, middle-class, nor upper-class. We ALL spend a great bundle of money on child care. I work hard.

We should get more women into Congress. Our government should do more to encourage hard work and diligence.

18 bill March 12, 2012 at 9:54 am

I am a single dad. I have been through hell over the last three+ years. I have been injured on the job, laid off one week after medical release, then begun the horrible Divorce process. I was finally recalled back to my position (rehired) after just over a year (literally 1yr 2dys) only to find out that hours are cut and the normal OT is removed and down to 35 hours we all went. So for nearly a year and a half I worked as much as I could/allowed, struggling to make ends meat and buy 2nd grade heating oil to keep my son warm Only to become laid off again….Now Keep in mind I still am hashing out my dumb divorce (married filing separate) and I need my child care credit….It actually helps me….I have worked my ass off doin whatever I can to make money or find a more stable job. Now What I dont get is why do I get denied the child care credit after my taxes are done and my accountant has triple checked them for the last 2 years in a row…I once was told that because I was a nice guy and let my Ex move back in for a couple months at the second half of the year the first denial but now I am denied for no reason for the second consecutive year…Now my Daycare cost just under $6k a year (FT). I have no desire to change that cuz my son has grown and developed tremendously over the last nearly 3 and half years he has been goin there. At this point it is not a benefit to me to keep him in school (ie..laid off) but for his best interests…He is becoming a great little man and I will not disrupt that. SO…..you tell me….Why cant i even get it yet everyone is complaining about how small it is…when that amount is needed no matter how “small” it is…….???

19 Jamie Shehan January 16, 2013 at 6:28 pm

I am doing my taxes today, although they won’t be accepted yet. I ALWAYS do them the first week in January (for the most part) because I find if I do not, I’ll be on extensions as well.

TurboTax told me that I didn’t owe enough tax to get the credit. I did, however, pay a ton of tax. I didn’t make much in the end…but I remember getting my commission checks and beings floored by the percentage being taken out.

When I went back to work this year after staying home I was excited. I finally decided if I had to “pay to work” I would because I am at the time in my life I need work. Money or not.

Well, the child-care chasing your tail game got me again. We paid about half of my income (AT LEAST) to childcare expenses. So…we decided this year my spouse will stay home and I will work. I make more and then there is no need for childcare. I see no reason to rob Peter to pay Creepy-Kid-Keepers just so we can sweat it when the bill comes. Paying to work is not how it should be. But, alas…we had kids, we find the loop-holes, then we kick the loop-holes butts and figure out our own path that works for us.

Sadly, there’s no loop-hole for this bogus credit.

Leave a Comment

{ 4 trackbacks }

Previous post:

Next post: