We’re just a few months into the Trump era, but already, first daughter Ivanka Trump has a signature issue: She has repeatedly declared her support for making child care more affordable. During her father’s presidential run, she described the plan as “a very comprehensive and really revolutionary plan.” In his speech to a joint session of Congress, President Trump re-affirmed his commitment to “work with members of both parties to make child care accessible and affordable, to help ensure new parents…have paid family leave.”
But when details of the Trump plan leaked last week, the response — from both sides of the aisle — was negative. A conservative foundation said the $500 billion plan would provide its largest benefits to more affluent families. Meanwhile, commentary in the media called it everything from expensive to regressive to a vehicle to “help the wealthy pay their au pairs.”
There’s a lot of noise around the plan right now — and we’re still waiting on some key details — but parents around the country are likely wondering one thing: What will the proposal mean for them?
With that in mind, we dug into the proposals and crunched the numbers to see if we could figure out what’s really going on.
What’s in Ivanka Trump’s Plan?
First things first: Let’s talk about Ivanka Trump’s plan.
As Bloomberg first reported, the First Daughter has met with members of the House and Senate have to discuss a proposed child care tax benefit, a plan that’s “broadly similar” to the outline then-candidate Donald Trump released last fall. According to Bloomberg, aides on the House Ways & Means Committee have also discussed a child care tax deduction with the administration.
On the campaign trail, Trump called for a child care tax deduction that would allow individuals earning less than $250,000 a year (or couples earning less than $500,000) to deduct a certain amount — up to the average cost of child care in their state — from their income taxes. The deduction would cover up to four children per household from birth through age 13.
But the real focus is on exactly how that deduction would be delivered—an important nuance that could have big consequences. As outlined by Bloomberg, Ivanka Trump’s proposal for a child care tax deduction would appear to provide more of a benefit for affluent families rather than middle- and lower-income families. “It actually doesn’t help make child care affordable for the vast majority of working families,” Care.com CEO Sheila Lirio Marcelo said in an interview with Bloomberg. Alan Cole, an economist with the conservative-leaning Tax Foundation, said the largest beneficiaries of the plan would be high-earning dual-income households who pay for child care.
During the campaign, Trump’s proposal also called for the creation of dependent care savings plans and expansion of the earned income tax credit to provide a child care rebate for lower-income families without income tax liability. So how would Trump’s plan deal with families who are struggling with access to affordable care? For that matter, what is a child care deduction, anyway? And how is that different than a tax credit?
What’s the Big Difference Between a Child Care Tax Deduction and a Child Care Tax Credit? And Why Does It Matter?
This is the key to understanding the Trump child care tax proposal: a Child Care Tax Deduction is not the same thing as a Child Care Tax Credit. In fact, they’re very different, and that difference has huge implications for who would benefit. Here are some basic explanations of a few key terms:
- Tax Deduction: The central element to the Trump plan is a child care tax deduction. Tax deductions lower your taxable income, but the amount you save depends on your marginal tax rate. Said another way, the higher your tax bracket, the higher the value of the deduction. “For example,” the Tax Policy Center notes, “a $10,000 deduction reduces taxes by $1,500 for people in the 15 percent tax bracket, whereas the same deduction cuts taxes by $3,500 for those in the 35 percent tax bracket.” The difference is starkest at the bottom of the income ladder, where the need for affordable care is most acute: For lower-income families who don’t make enough to pay Federal income taxes, tax deductions offer no benefit at all.
- Tax Credit: In contrast to tax deduction, tax credits reduce what’s known as your tax “liability”: That’s a reduction in the amount of taxes you pay, not the amount of money on which you pay taxes. As the Christian Science Monitor explains (emphasis ours): “A tax credit valued at $1,000, for instance, lowers your tax bill by a corresponding $1,000….[Tax] deductions lower your taxable income by the percentage of your highest federal tax bracket. So if you fall into the 25 percent tax bracket, a $1,000 deduction saves you $250.” The obvious, generalized lesson: Tax credits are often more valuable than tax deductions. Examples of tax credits include the Child and Dependent Care Tax Credit (see below), and the Premium Tax Credit, which was designed to help individuals and families with low to moderate income afford health insurance. Of course, it’s impossible to reduce your tax liability to below zero. And for the most popular type of tax credit, known as “non-refundable,” that means the lowest-income families—the ones who don’t pay taxes—still won’t benefit. There is, however, another kind of tax credit—called a refundable tax credit—which gives a rebate to families even if they pay low or no taxes.
- Child and Dependent Care Tax Credit: The child and dependent care tax credit is a tax break designed to do exactly what it says: help families pay for care, ostensibly so they can go to work, or look for work. As many have pointed out, it doesn’t come close to matching the real costs of childcare. The maximum credit is $3,000 for one dependent, or $6,000 for two or more. (To learn more about the qualifying criteria for the child and dependent care tax credit, see the IRS’s guidelines here.) The Child and Dependent Care Tax Credit is of the non-refundable type. The Tax Policy Center has estimated that making it refundable would help an additional 1 million people, and that “[m]ore than a third of the benefits would go to households with income less than $30,000.”
- Earned Income Tax Credit: The earned income tax credit, or EITC, is intended to reduce the amount of taxes owed by, or provide a refund to, low- to moderate-income earners. (Learn more about the qualifying criteria for the earned income tax credit here.)
So, Which Kinds of Tax Breaks Is Trump Proposing?
Trump’s child care tax benefit plan has three main elements, as explained in recent reporting and information published during the presidential campaign this fall.
- Child Care Tax Deduction: The Trump proposal would reportedly allow families to deduct child care expenses for up to four children under the age of 13. The deductible expenses would be capped at the average cost of care in the state where the family lives. To be eligible, income would have to be less than $250,000 for individuals and $500,000 for married couples filing jointly. Based on the plans released during Trump’s campaign, the deduction would be available to families whether they use paid or informal care, like in the case of stay-at-home parents.
- Dependent Care Savings Accounts: Trump’s plan would also allow families to open dependent care savings accounts in which immediate family or their employers could deposit up to $2,000 per year for children under 18 and/or elderly dependents. These contributions would be tax deductible, and appreciation in the accounts would not be taxed. To incentivize lower-income families to participate in the program, Trump proposed a government match for lower income families up to 50 percent for up to $1,000.
- Child Care Spending Rebate: Finally, the plan called for expanding the Earned Income Tax Credit to offer a child care spending rebate of up to $1,200 per year for lower-income families. (In this case, lower-income was defined as married couples filing jointly with income under $62,400 or less and individuals with income of $31,200 or less.) In practice, the rebate may be significantly less than $1,200. According to the plan, the credit would be worth 7.65 percent of eligible child care expenses, capped at half the value of payroll taxes provided by the tax filer. That means, for instance, a married couple paying $10,000 per year in child care costs would see a rebate of just $765.
Experts on both sides of the aisle have said that using the tax system could make sense for addressing the cost of child care. However, many have panned the Trump child care tax deduction as regressive. The plan, they say, would help affluent families more than those most in need of help. And for some middle-class families, analysts warn, overall taxes under Trump’s plan could actually rise.
Is There a Better Way?
Maybe. When you hear policy experts talk about how to fix Trump’s plan, there’s another term you’re likely to hear in the days and weeks ahead:
- Advanced Refundable Tax Credit: What’s that, you ask? Several analysts—including the American Enterprise Institute, a conservative think tank—have suggested expanding the existing Child and Dependent Care Tax Credit to make it available to low- and moderate-income families. That could be done in several ways:
- Expanded: Increasing the child and dependent care tax credit’s expense limits, so that the program covers a greater proportion of what families actually spend on care.
- Advanced: Providing the credit in advance or via regular payments throughout the year so the financial benefit is available to families when they’re paying for care.
- Refundable: If the credit was to be made refundable, families who owe no income tax could receive the full amount of the credit as a refund, and those families for whom the amount of the credit is more than their liability could receive the difference as a refund.
The existing child and dependent care tax credit is non-refundable and capped well below the actual cost of child care for most working families in the United States. So the thinking here is that an expanded, advanced and refundable child and dependent care tax credit would reach more families, while providing the assistance and flexibility that most working families need.
Of course every family has their own relationship with care to consider, but a basic understanding of tax terminology is helpful to understanding what President Trump’s child care tax benefit plans could mean for you and your loved ones.
