Alvaro Gonzalez | Moment | Getty Images
A lack of available childcare could cost the U.S. economy up to $329 billion over the next 10 years, a 2025 Bipartisan Policy Center report found.
One untapped way for families and the businesses that employ them to save on those costs could be through existing tax incentives, according to a new report from the U.S. Congress Joint Economic Committee — Minority.
Just 13% of private sector workers have access to childcare benefits through their employers, according to the report. Moreover, existing childcare tax incentives are underused or difficult for businesses and their employees to navigate, the report states.
Tax incentives to reduce the cost of childcare
Eligible workers may be able to offset their childcare expenses by claiming the child and dependent care tax credit, or CDCTC.
The CDCTC lets families who meet certain criteria offset a portion of their childcare and dependent care expenses against their federal income tax liability. The credit can partially offset up to $3,000 in care expenses for one qualifying individual and up to $6,000 for two or more qualifying individuals.
Yet only about 12% of taxpayers with children claim the credit, according to the report. Some workers who are eligible may have difficulty navigating the credit, and therefore don’t claim it, the report said, while others may be ineligible due to not having qualifying expenses, owing no federal taxes or earning too much money.
Businesses may set up dependent care assistance program, or DCAP, accounts for employees. Those accounts enable families to set aside up to $7,500 in pretax income for childcare expenses. That money is not subject to taxes so long as it is used on childcare or other qualifying expenses. Fewer than half of private-sector workers have access to these accounts, according to the report.
The DCAP, also called a dependent care FSA, is an “immediate tax saving win,” said Sean Lovison, a certified financial planner, certified public accountant and founder of Purpose Built, an independent financial planning firm in Moorestown, New Jersey.
It can be especially helpful for high earners to shield a portion of their income, he said. But it’s important to remember that it’s a use-it-or-lose-it account, which means the balance must be spent during the plan year on qualifying expenses such as preschool or summer day camps, according to Lovison. And it’s important to also remember there are exceptions, like sleepover camps, he said.
A separate employer-provided tax credit, known as 45F, helps businesses offset the cost of providing childcare. Businesses that invest in childcare for their employees, either by building and operating a childcare facility or partnering with a childcare provider, can subtract 40% of eligible expenses — or 50% for small businesses — from what they owe in taxes. That may provide up to a maximum of $500,000 annually in tax savings through a nonrefundable credit, or up to $600,000 for small businesses.
Despite those savings, less than 1% of corporate returns used the 45F program, according to the report, which cites the latest available tax filing data from 2016.
By fully using available tax incentives for childcare, a hypothetical business could save $820,000 in taxes over five years and generate more than $8 million in return on investment through reduced employee turnover and increased productivity, according to an example scenario in the report. Meanwhile, a parent employed at that business could save almost $10,000 over five years.
The report comes a few months after ranking member of the committee, Democratic Sen. Maggie Hassan of New Hampshire, proposed a bill with Republican Sen. Dan Sullivan of Alaska, to create a business childcare liaison at the IRS who would educate businesses about existing childcare tax incentives.
