	Introduction

There are two tax provisions that subsidize the child and dependent care expenses of working parents: the child and dependent care tax credit (CDCTC) and the exclusion for employer-sponsored child and dependent care. Child and Dependent Care Tax Credit

The child and dependent care tax credit is a nonrefundable tax credit that reduces a taxpayer's federal income tax liability based on child and dependent care expenses incurred so the taxpayer can work or look for work. Eligibility for the Credit

To claim the child and dependent care credit, a taxpayer must meet a variety of eligibility criteria. Q ualifying individual: A qualifying individual for the CDCTC is either (1) the taxpayer's dependent child under 13 years of age, or (2) the taxpayer's spouse or dependent who is incapable of caring for himself or herself. Earned income : A taxpayer must have earned income to claim the credit. The amount of qualifying expenses claimed for the credit cannot be greater than the taxpayer's earned income for the year (or the earned income of the lower-earning spouse in the case of married taxpayers). For married couples filing jointly, both spouses must have earnings unless one is either a student or incapable of self-care. Qualifying Expenses

Qualifying expenses for the credit are generally defined as expenses for the care of a qualifying individual so that a taxpayer (and their spouse, if filing jointly) can work or look for work. Calculating the Credit Amount

The amount of the CDCTC is calculated by multiplying the amount of qualifying expenses, after applying the dollar limits and earned income limits (discussed below), by the appropriate credit rate. The credit rate used to calculate the credit is based on the taxpayer's adjusted gross income (AGI). The credit rate is set at a maximum of 35% for taxpayers with AGI under $15,000. The maximum amount of expenses that can be multiplied by the credit rate is $3,000 if the taxpayer has one qualifying individual and $6,000 if the taxpayer has two or more qualifying individuals. Even though the credit formula—due to the higher credit rate—is more generous toward lower-income taxpayers, many receive little or no credit since the credit is nonrefundable, as illustrated in Figure 1 . The eligibility rules and definitions of the exclusion are similar to those of the credit. Specifically, the $5,000 limit applies irrespective of the number of qualifying individuals. Interaction Between the CDCTC and Exclusion for Employer-Sponsored Child and Dependent Care

Taxpayers can claim both the exclusion and the tax credit but not for the same out-of-pocket child and dependent care expenses. For every pretax (i.e., excluded) dollar of employer-sponsored child and dependent care, the taxpayer must reduce the maximum amount of qualifying expenses for the credit (up to $3,000 for one child, $6,000 for two or more children). Data on the CDCTC

The aggregate data for the child and dependent care credit indicate several key aspects of this tax benefit. Income l evel of CDCTC c laimants: Middle- and upper-middle-income taxpayers claim the majority of tax credit dollars. Average c redit a mount: At most income levels the average credit amount is between $500 and $600. Lower-income taxpayers receive less than the average amount. This participation rate is significantly lower for lower-income taxpayers. However, survey data from the Bureau of Labor Statistics indicate that about 41% of employees have access to child and dependent care flexible spending accounts, while 11% have access to employer-sponsored childcare. Overall, the data indicate that these benefits are more widely available to more highly compensated employees at larger establishments.
Two tax provisions subsidize the child and dependent care expenses of working parents: the child and dependent care tax credit (CDCTC) and the exclusion for employer-sponsored child and dependent care. (Note these provisions were not changed by P.L. 115-97.)
The child and dependent care tax credit is a nonrefundable tax credit that reduces a taxpayer's federal income tax liability based on child and dependent care expenses incurred. The policy objective is to assist taxpayers who work or who are looking for work. A taxpayer must meet a variety of eligibility criteria including incurring qualifying child and dependent care expenses for a qualifying individual and have earned income. These three terms are defined below:
Qualifying expenses: Qualifying expenses for the credit are generally defined as expenses incurred for the care of a qualifying individual so that a taxpayer (and their spouse, if filing jointly) can work or look for work. (Married taxpayers who do not file a joint return are ineligible for the credit). Qualifying individual: A qualifying individual for the CDCTC is either (1) the taxpayer's dependent child under 13 years of age for the entire year or (2) the taxpayer's spouse or dependent who is incapable of caring for himself or herself. Earned income: A taxpayer must have earned income to claim the credit. For married couples, both spouses must have earnings unless one is a student or incapable of self-care.
The CDCTC is calculated by multiplying the amount of qualifying expenses—a maximum of $3,000 if the taxpayer has one qualifying individual, and up to $6,000 if the taxpayer has two or more qualifying individuals—by the appropriate credit rate. The credit rate depends on the taxpayer's adjusted gross income (AGI), with a maximum credit rate of 35% declining, as AGI increases, to 20% for taxpayers with AGI above $43,000. Even though the credit formula—due to the higher credit rate—is more generous toward lower-income taxpayers, many lower-income taxpayers receive little or no credit since the credit is nonrefundable.
In addition to the CDCTC, taxpayers can exclude from their income up to $5,000 of employer-sponsored child and dependent care benefits, often as a flexible spending account (FSA). Eligibility rules and definitions of the exclusion are virtually identical to those of the credit. However, this is one major difference—the $5,000 limit applies irrespective of the number of qualifying individuals. Taxpayers can claim both the exclusion and the tax credit but not for the same out of pocket child and dependent care expenses. In addition, for every dollar of employer-sponsored child and dependent care excluded from income, the taxpayer must reduce the maximum amount of qualifying expenses claimed for the CDCTC.
The aggregate data for the CDCTC indicate several key aspects of this tax benefit. First, middle- and upper-middle-income taxpayers claim the majority of tax credit dollars. Second, at most income levels the average credit amount is between $500 and $600. Lower-income taxpayers receive less than the average amount. Third, the credit is used almost exclusively for the care of children under 13 years old (as opposed to older dependents). On average 13% of taxpayers with children claim the credit. This participation rate is significantly lower for lower-income taxpayers.
Data from the Bureau of Labor Statistics indicate that about 40% of employees have access to a child and dependent care flexible spending account, while 11% have access to other types of employer-sponsored childcare. Overall, these data indicate that these benefits are more widely available to higher-compensated employees at larger establishments.