	Introduction

Some policymakers have shown interest in having the federal government offset some of the costs families incur for child care, most recently as part of the tax reform debate in the 115 th Congress. The child and dependent care tax credit (CDCTC or "child care credit") is designed to reimburse taxpayers for a portion of their out-of-pocket child care expenses. The report then turns to an analysis of four selected policy changes to the current credit: (1) making the current credit refundable, (2) converting the credit to a deduction, (3) increasing the credit rate, and (4) increasing the amount of qualifying expenses. Estimates presented in this report are derived using 2014 calendar year data. Hence, estimates reflect 2014 credit amounts as well as the impact of policy options in 2014. Hence, the "bottom" quintile (i.e., quintile 1) represents the 20% of taxpayers with the lowest income, and the top quintile (i.e., quintile 5) represents the 20% of taxpayers with the highest income. Taxpayers in the lowest income quintile have a median out-of-pocket child care expense of $857, with some taxpayers in this quintile incurring an estimated $5,000 in out-of-pocket child care and others incurring no out-of-pocket child care expenses. The current CDCTC is a nonrefundable credit, meaning the value of the credit is limited by the taxpayer's income tax liability. Since many low-income taxpayers have little to no income tax liability, they generally do not benefit from nonrefundable tax credits. Making the credit refundable would benefit lower-income populations. Some taxpayers may receive a smaller benefit in terms of tax savings with a deduction than with a credit. What Is the Impact of Increasing the Amount of Qualifying Expenses? Policymakers may be interested in increasing the maximum amount of expenses that can used to calculate the credit. Once again, the main driver of these estimates is likely that higher-income taxpayers tend to have higher expenses than lower- and moderate- income taxpayers. Lower out-of-pocket child care expenses does not necessarily mean that lower-income population do not have child care needs; rather, it may indicate that these needs are met informally—such as having a neighbor or relative watch a child during the workday. Policy options that increase the amount of allowable expenses, increase the credit rate, or are based on the amount of expenses (such as a deduction) will tend to provide the largest benefit to the higher-income taxpayers who have higher child care expenditures to begin with (see Figure 5 ). Policy Simulation Models
This report examines four options for altering the CDCTC: (1) making the credit refundable, (2) converting the credit to a deduction in determining AGI, (3) raising the credit rate to 50% of qualified child care expenses, and (4) doubling the maximum qualified child care expenses allowed by the credit.
Some policymakers have shown interest in having the federal government offset some of the costs families incur for child care. The child and dependent care tax credit (CDCTC or "child care credit") reimburses some taxpayers for a portion of their out-of-pocket child care expenses. The CDCTC is a nonrefundable tax credit, meaning taxpayers with little or no income tax liability—including many low-income taxpayers—receive little if any credit. Using the TRIM3 model, this report provides estimates of key characteristics of the CDCTC under current law and estimates the distributional effect of selected policy options that would change the credit. Estimates presented in this report are derived using 2014 calendar year data. Hence, estimates reflect 2014 credit amounts as well as the impact of policy options if implemented in 2014.
Analysis of the credit under current law indicates
A significant amount of the benefit goes to higher-income taxpayers. An estimated 35% of the tax units claiming the credit were in the highest-income quintile (top 20%) in 2014. In contrast, 1% of all CDCTC recipient families were in the lowest-income quintile in the same year. Over 7 out of 10 CDCTC families were married couple families where both parents worked, with the remaining being single parents who worked. The typical (median) amount and range of spending on child care increased with income among credit recipients.
This report estimates the distributional impact of four policy options to modify the CDCTC.
1. Making the credit refundable. Refundability would primarily benefit families in the bottom two income quintiles. 2. Convert the credit into a deduction. Converting the credit to an above-the-line deduction would primarily benefit the top 20% of taxpayers. Some taxpayers in the second-lowest income quintile would receive a smaller benefit in terms of tax savings with a deduction than with a credit. 3. Increasing the credit rate. Increasing the credit rate to a uniform 50% would primarily benefit the top 40% of taxpayers. 4. Increase the maximum amount of expenses. Doubling the amount of allowable expenses that could be applied toward the credit would primarily benefit the top 40% of taxpayers.
One major factor driving these estimates is the underlying distribution of out-of-pocket child care expenses. Lower-income families with children tend to have significantly lower out-of-pocket child care expenses than do higher-income taxpayers. Lower out-of-pocket child care expenses do not necessarily mean that lower-income people do not have child care needs; rather, it may indicate that these needs are met informally. In contrast, policy options that increase the amount of allowable expenses, increase the credit rate, or are based on the amount of expenses (like a deduction) will tend to provide the largest benefit to the higher-income taxpayers who have higher child care expenditures to begin with.