The Effects of the Child and Dependent Care Tax Credit on Child Care Affordability - Executive Summary

Sep 19, 2026

The report analyzes how the Child and Dependent Care Tax Credit (CDCTC) affects child care affordability and why the pre-2021 structure fails to meaningfully support low-income families. It describes changes introduced by the American Rescue Plan Act, including higher expense limits, increased credit rates, and full refundability, then argues these improvements are temporary. The brief outlines policy options to sustain and expand CDCTC benefits, potentially combined with reforms to the Dependent Care Assistance Program.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages21

Reading Time7 min

AccessFree to download

Executive Summary

How the existing CDCTC works and why it fails to support low-income families

10 ways the CDCTC can be changed and how such changes would affect families

How changes to the CDCTC by the American Rescue Plan will affect families

The CDCTC beyond the American Rescue Plan

I D E ASA C T I O N RES ULT S The Effects of the Child and Dependent Care Tax Credit on Child Care Affordability H ow t e m p o ra r y c h a n g e s t o t h e C h i ld a n d D e p e n d e n t C a r e Ta x C r e d it w i l l a ff e c t c h i ld c a r e a ff o rd a b i l ityi n 2 0 2 1 a n d h ow w e c a n t h i n k a b ou t i m p r ov i n g t h e t a x c r e d it f o r t h e l o n g t e r m AUTHORS Benjamin Wolters Kathlyn McHenry Staff Associate Director, Early Childhood Bipartisan Policy Center Initiative Bipartisan Policy Center Linda K. Smith Director, Early Childhood Initiative Bipartisan Policy Center AC K NOW L EDGM ENTS The Bipartisan Policy Center’s Early Childhood Initiative is grateful to the David and Lucile Packard Foundation, the HeisingSimons Foundation, and the W. K. Kellogg Foundation for their generous support of our work. D ISCLA IM E R The findings and conclusions expressed herein do not necessarily reflect the views or opinions of BPC, its founders, its funders, or its board of directors. Table of Contents 4 EXECUTIVE SUMMARY 6 HOW THE EXISTING CDC TC WORKS AND WHY IT FAILS TO SUPPORT LOW-INCOME FAMILIES | 10 WAYS THE CDC TC CAN BE CHANGED AND HOW SUCH CHANGES WOULD AFFECT FAMILIES | | --- | | 1 2 HOW CHANGES TO THE CDC TC BY THE
AMERICAN RESCUE PLAN WILL AFFECT FAMILIES | 16 THE CDC TC BEYOND THE AMERICAN RESCUE PLAN 3 Executive Summary The American Rescue Plan Act signed into law on March 11, 2021 includes a number of provisions that will help parents afford the quality child care they need in order to get back to work in 2021. Among these are landmark changes to an important, yet seldom publicized component of the tax code: the Child and Dependent Care Tax Credit (CDCTC) . The CDCTC is a tax policy intended to help offset a portion of families’ child or dependent care expenses by reducing their federal income tax liability. However, as we have written before, the existing structure of the credit fails to meaningfully help low-income families afford child care.1 After two decades without any improvement, the American Rescue Plan is the first law to alter the CDCTC, making it work for the families that need the tax credit the most. a For 2021, the law increases the maximum amount of child care expenses families can claim, from $3,000 to $8,000 per child; increases the percentage of those expenses for which families will receive a credit from 35% to 50%; and by making the credit fully refundable, ensures that these changes will benefit the lowest-income families who have little to no tax liability.2 But these long overdue changes are temporary, only lasting through 2021. The underlying structure that for decades has failed to support the families who need the credit most, remains. The following brief has two aims; first, to explain the significance of the American Rescue Plan’s changes in the context of the existing CDCTC structure. And second, to prompt an informed discussion on how to improve the CDCTC, and to ensure these changes are sustained for the families who can least afford quality child care. It is a certainty that the childcare affordability crisis will not cease after 2021. For many families in the United States, child care was unaffordable before the pandemic,3 and with the increased health and safety costs providers must cover going forward, will continue to be so after the pandemic. This brief intends to clarify this tax policy so that policymakers may consider how to better These long overdue changes are temporary, only lasting through 2021. The underlying structure that for decades has failed to support the families who need the credit most, remains. structure the credit to help low-income families afford child care beyond the the timeline of the American Rescue Plan and the current health crisis. a For purposes of this brief, we analyze the CDCTC based on its impacts for families with children, not for families who have othe

FAQs

What is the Child and Dependent Care Tax Credit (CDCTC) intended to do?

The CDCTC offsets a portion of families’ child or dependent care expenses by reducing federal income tax liability.

What major changes did the American Rescue Plan Act make to the CDCTC for 2021?

For 2021, the maximum eligible child care expenses increased from $3,000 to $8,000 per child, the credit rate rose from 35% to 50%, and the credit became fully refundable.

Why does the report argue the existing CDCTC structure is inadequate for low-income families?

The report states the existing structure fails to meaningfully help low-income families afford child care and that, before these changes, families most in need were not receiving sufficient benefit.

Sep 19, 2026

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