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A lack of available child care could cost the US economy up to $329 billion over the next 10 years, the Bipartisan Policy Center’s 2025 report found.
One underutilized way for families and businesses to save on those costs could be by using existing tax incentives, according to a new report by the US Congress Joint Economic Committee – Minority.
Only 13% of private sector workers receive childcare benefits from their employers, according to the report. In addition, existing child care tax incentives are underutilized or difficult for businesses and their employees to navigate, the report said.
Tax credits to reduce childcare costs
Eligible workers can pay their child care expenses by claiming the child care tax credit, or CDCTC.
The CDCTC allows families who meet certain criteria to offset part of their child care and dependent care expenses against their income tax liability. The credit can partially reduce up to $3,000 in care expenses for one eligible person and up to $6,000 for two or more eligible people.
However, only 12% of taxpayers with children claim credit, according to the report. Some eligible workers may have difficulty navigating credit, so they don’t seek it, the report said, while others may not qualify because they don’t have eligible expenses, don’t owe federal taxes or earn too much.
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 taxable income for child care expenses. That money is not subject to taxes as long as it is used for childcare or other reasonable expenses. Less than half of private sector employees have access to these accounts, according to the report.
A DCAP, also called a Dependent Care FSA, is “an instant tax savings win,” says Sean Lovison, a certified financial planner, certified public accountant and founder of Purpose Built, an independent financial planning firm in Moorestown, New Jersey.
It would be especially helpful for high earners to protect part of their income, he said. But it’s important to remember that it’s a use-it-or-lose-it account, meaning the remaining funds must be used during the program year for eligible expenses such as preschool or summer day camps, according to Lovison. And it’s important to remember that there are exceptions, such as sleep camps, he said.
A separate employer-provided tax credit, known as 45F, helps businesses pay the costs of providing for children. Businesses that invest in childcare for their employees, by building and operating a childcare facility or partnering with a childcare provider, can deduct 40% of eligible costs (or 50% for small businesses) from what they owe in taxes. That could provide up to $500,000 a year in tax savings through a refundable credit, or up to $600,000 for small businesses.
Despite those savings, less than 1% of corporate profits have used the 45F system, according to the report, which cites the latest available tax filing data from 2016.
By taking full advantage of available childcare tax credits, 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 a case study in the report. Meanwhile, a parent employed in that business can save about $10,000 over five years.
The report comes a few months after the committee’s ranking member, Democratic Sen. Maggie Hassan of New Hampshire, proposed a bill with Republican Sen. Dan Sullivan of Alaska, to create an IRS childcare business liaison to educate businesses about available childcare tax incentives.
