If your family looks a bit like Ivanka Trump’s, you might just have a shot at benefiting from the national child care proposal she’s shopping around Congress. But if you’re one of the millions of low- and middle-income parents hoping to catch a break? Don’t count on it.
The New York Times reported that the first daughter has been holding meetings “quietly” (she has no formal role in her father’s administration) to push her trademark issue of boosting opportunities for working women through child care and paid family leave policies. But a study released late last month shows that her father’s campaign promise to ease the burden of child care costs could end up mainly benefiting wealthy families.
Seventy percent of the total child-related tax benefits would go to families making more than $100,000, according to the paper by the Tax Policy Center. The child care proposal itself would cost about $115 billion over a decade, 2 percent of Trump’s overall $6.1 trillion tax plan. Neither the White House nor Ivanka Trump’s team has offered any additional specifics of the child care plan since the election, so the TPC’s study relies on details outlined during Trump’s campaign.
Trump’s most recent tax plan looks at first like it gives parents a tax break by allowing them to take a larger standard deduction, but other changes to the tax code — eliminating personal exemptions and repealing head of household filing status — end up more than offsetting that. (Vox’s Dylan Matthews has a more thorough look at potential middle-class tax increases here.)
Combined with those potential losses, families with an income between $20,000 and $50,000 actually face tax hikes, while families making between $50,000 and $75,000 would see an average increase of after-tax income of only 0.1 percent — virtually nothing.
The high cost of child care is a significant barrier for working Americans. This is especially true for a single parent, whose child care cost for one child age 4 or younger can be 20 to 60 percent of median income in all 50 states and reaches nearly 90 percent of median income in Washington, DC.
For married couples with young children, 4 to 13 percent of a state’s median income is spent on child care costs. If their combined income is too low, the cost of child care might compel a lower-paid parent to leave the workforce or deter a stay-at-home parent from rejoining it.
And of course these statistics don’t reflect the large numbers of families that rely on relatives who provide unpaid labor to watch over their children.
How Trump’s plan benefits high-income families
While the idea of getting a tax cut to pay for child care sounds beneficial to parents, Trump’s actual proposal delivers little tangible benefit to the families that need it the most.
His plan relies on three changes to the tax code: a refundable credit for low-income parents, an above-the-line deduction for child care costs, and a tax-preferred dependent care savings account.
The refundable credit applies to the two kinds of low-income families with child care expenses for up to four children under the age of 13:
- Single parents in the labor force who makes under $31,200
- Couples with both parents in the labor force making under $62,400 total
A refundable credit can allow a family to receive a refund, so if a family owes $1,000 in taxes and receive a refundable credit of $1,500, they’d get a $500 refund. In contrast, if the $1,500 were a nonrefundable credit — such as the existing child and dependent care tax credit — then the family wouldn’t owe any taxes but would have to forfeit the excess $500.
The refundable credit is, notably, not offered to low-income couples with one stay-at-home parent. Some conservatives have endorsed child tax credits, a benefit that parents would get whether or not they work outside the home, possibly encouraging them to stay home with their kids. But Trump’s credit would only apply to parents who need and pay for child care while they’re working. Qualifying families can claim the lesser of 7.65 percent of their child care expenses or 3.825 percent of the single parent’s income or the lesser-earning spouse’s income, capped at the average cost of child care per state.
Wealthy families obviously won’t benefit from this credit, but there’s not much for lower-income families to work with either. The authors of the study provided several examples of families with one 4-year-old child based in Michigan, where toddler care costs are close to the national median. A single mother who works full time could enroll her 4-year-old child in center-based care at the average cost of $8,328 a year. If she works at minimum wage and earns $15,000 a year, then child care would be about 55 percent of her income. She’d get a $574 credit from Trump’s plan, reducing her child care expenses to 51 percent — a measly 4 percentage points.
And the reality is that low-income families like hers typically pay much less than average statewide, meaning they benefit even less than the above example shows. In the case that a relative watched her child for free, a common arrangement, she wouldn’t get anything.
The above-the-line deduction is also capped at the average cost of child care for the child’s age in the state. Low-income parents who qualify for the credit could, theoretically, take the deduction, but they typically earn too little money to benefit.
The deduction includes the following kinds of families with child care expenses for up to four children under the age of 13:
- Single parents who make under $250,000
- Couples with two incomes under $500,000
- Couples with one income under $500,000
The first two groups would deduct their actual child care expenses up to the state average cost of care, while the third could deduct the full amount of the state average, despite incurring no actual child care expenses.
Unlike the refundable credit for lower-income families, who qualify only if every parent in the household works outside the home, couples with a stay-at-home parent would still benefit from the deduction. It’s “a belated recognition by the federal government of the economic value of the work provided by stay-at-home parents,” Trump’s plan says — but doesn’t clarify why the government doesn’t assign similar value in the form of a credit to stay-at-home parents in families that earn less.
The benefits across income range vary wildly under the deduction plan. For a two-parent family making $65,000, the $8,328 cost of enrolling a 4-year-old at a child care center for a year represents 12 percent of their income, qualifying them for the refundable credit. A similar couple making $250,000 only spends 3 percent of their income on the same child care. Both families could receive $600 from the existing CDCTC that typically helps middle- and higher-income families.
Since higher-income families pay higher marginal tax rates, a richer family will get a larger dollar value from the deduction. In this case, the lower-income family will get an additional tax break of $629 from the credit, but the family making $250,000 will get a $1,460 break from the deduction. That reduces the share of child care costs from 3 percent to 2 percent of their income, as opposed to the 11 percent of the lower-income family’s costs — though changes to the tax brackets could end up increasing the wealthier family’s taxes overall.
The dependent care savings account offers tax-free contributions and withdrawals for up to $2,000 per child per year, for all families with children. The funds must be applied to child care, after-school programs, private school tuition, or higher education. Low-income families — the limits are not specified in Trump’s plan — would receive a 50 percent match on their first $1,000 in contributions.
But DCSAs don’t tend to help low-income families for several reasons:
- There are low adoption rates of savings accounts like DCSAs among low-income families, even when offered assistance to open one.
- Lower-income families that did manage to save would likely spend the funds faster, and so would not benefit from any possible tax savings.
- No-tax savings is of no benefit to the lowest-income families, who don’t owe federal taxes.
Meanwhile, wealthy families can stow away thousands of dollars per child annually to be spent anytime in the future, and not just for standard child care: Music lessons and private school tuition, among other child-related costs, can be paid for with DCSA funds too.
For families living paycheck to paycheck, a child care plan advanced through changes in the tax code means that a break could only ever come once a year, and dependent care is needed year-around. Without the time or money to navigate through the various options, they’re also more likely to miss opportunities to save. And an overall tax reform package that costs $6 trillion over a decade could hack away at social services, thus hurting low- and middle-income families even more over time.