TAP #11: Taxes and Child Care

NACCRRA TAP #11 A Technical Assistance Paper from The National Association for Child Care Resource and Referral Agencies

TAXES & CHILD CARE: Information CCR&Rs Can Use to Help Families and Employers Learn About the New Federal Tax Law Edna Ranck, Ed.D. What’s this TAP About? The Bush Administration spent a considerable amount of time promoting a significant tax reform bill in its first months in office. In June, The Economic Growth and Tax Relief Reconciliation Act of 2001 was signed into law. The law includes Title II, Tax Benefits Relating to Children. This section of the law has items of importance for you in your work as a child care resource and referral (CCR&R) agency. The new tax relief law contains benefits for children in low-income families and can change how employers support child care in the workplace. Numbered notes in the boxes are of particular importance.

Box Note #1 Print and Internet sources for additional information about the tax law are listed at the end of this NACCRRA Technical Assistance Paper (TAP). To read the law itself, go to http://thomas.loc.gov. Under “Legislation,” click on “Public Laws” and scroll to P.L. 107-16. Title II, Tax Benefits Relating to Children, begins on page 8.

What does our CCR&R organization need to know about the new tax law? The purpose of this NACCRRA Technical Assistance Paper (TAP) #11 is to provide CCR&R staff with basic information about the new tax law so they can inform parents, providers and employers about what the law can mean to them. CCR&Rs can expect to get questions from the people that they help – this TAP anticipates key questions and offers basic responses for your use.

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Box Note #2 Tax laws are complex and CCR&Rs and others in the child care field should consult with an accountant or tax professional for more in-depth information. All articles reviewed in preparing this TAP include the caveat to consult with tax experts in the implementation planning of the new tax law. Further actions for CCR&Rs to take with parents, providers and employers are suggested at the end of the TAP.

What is the law called? “The Economic Growth and Tax Relief Reconciliation Act of 2001” was passed by both the House and Senate in May (H.R. 1836). President Bush signed it into law on June 7, 2001, when it became known as Public Law 107-16. This TAP will call the tax relief law the “new tax law” or the ”tax law of 2001.”

What part of the new tax law relates to children? Title II, Tax Benefits Relating to Children is of interest to the early care and education field because of its impact on family economics and employer support for child care programs and child care resource and referral services. Title II has four key sections: Section 201: Modifications to child tax credit.

Section 202: Expansion of adoption credit and adoption assistance programs Section 204: Dependent care credit.

Section 205: Allowance of credit for employer expenses for child care assistance

Box Note #3 Section 203 of Title II is not addressed in this TAP. Section 203 states that the child credit described in Section 201 shall not be considered income nor be used to determine eligibility for programs funded by Federal and State funds. This means that the money that a family receives as a child credit cannot be used as a source of income when a family files its next income tax return or when a family applies for a child care subsidy, food stamps, Section 8 housing or similar government-funded subsidy.

Section 201. Modifications to the child tax credit.

The child tax credit that now becomes refundable increases in incremental amounts until the maximum amount of $1,000 per child is reached in the year 2010. See Table 1 below. The credit amount per child is $600 in each tax year from 2001 to 2004, $700 in each year from 2005-2008, $800 in 2009, and $1000 in 2010. The amount of the child tax credit is refunded to

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eligible families who file a tax return, unlike a “deduction” that is subtracted from income before taxes are calculated.

The child tax credit is refundable to low-income families who earn $10,000 or more in a year and who file a federal income tax return for 2001. A refundable credit means that even families who do not owe income tax will benefit. However, the government will issue a check in the amount of the tax credit only to eligible families who file a tax return.

Table 1. How The Refundable Child Tax Credit Works Years Current Child Credit 2001-2004

Amount of Credit $500 $600

2005-2008

$700

2009

$800

2010 or thereafter

$1,000

Refundable (Y/N) N Y – up to 10% of earnings above $10,000 Y – up to 15% of earnings above $10,000 Y - up to 15% of earnings above $10,000 Y - up to 15% of earnings above $10,000

Source: National Women’s Law Center, June 2001

Box Note #4 The tax credit cannot exceed 10 percent of the taxpayer’s earned income in excess of $10,000 through 2004. For example, a family whose annual earnings equal $12,000 will receive 10 percent of the $2,000 over and above $10,000, that is, $200. In the tax year 2005 and thereafter, the percentage of the amount of earnings over $10,000 increases to 15 percent. For example, the same family earning $12,000 will then receive $300 in child tax credits. The tax credit will be indexed to inflation beginning in 2002.

Advocates for children and families worked hard to get Congress to change the child credit so that it would be refundable for eligible families who file an income tax return. The final bill will help over 15 million more children than did the original tax proposal. (Source: National Women’s Law Center, June 2001.)

As noted above in Box Note #3, the child tax credit cannot be used in determining eligibility for any program financed by government funds, such as food stamps, child care subsidies or Section 8 housing. This part of the tax law is effective in the current taxable year, that is, for tax returns filed for 2001.

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Section 202: Expansion of adoption credit and adoption assistance programs.

The law extends the adoption credit to all children, including children with special needs, and makes the extension permanent. This means that when most of the tax law provisions end in 2010, Section 202 will remain in force. The maximum adoption credit for all children increases to $10,000. The income phase-out now begins at $150,000 of modified adjusted gross income and is available to families with annual incomes of up to $190,000. The adoption assistance that some employers provide is not to be considered as income in calculating the federal adoption credit.

Section 204: Dependent care credit.

The amount of the dependent care credit is expanded from $2,400 to $3,000 for one qualifying dependent, and from $4,800 to $6,000 for two or more dependents.

The maximum credit for a family’s employment-related expenses is expanded from the current 30 percent to 35 percent; that is, the maximum annual credit starting in the 2003 tax year will be up to 35 percent of $3,000 for one qualifying dependent or $6,000 for two or more.

The credit percentage “phase-down” will begin when adjusted gross income (AGI) increase from $15,000 to over $43,000. The changes will start after December 31, 2002 or in the 2003 tax year.

The dependent care tax credit is not refundable; that is, a family must show on their tax return that they have had actual child care expenses and the eligible amount of the credit will be credited on the income tax return.

Section 205: Allowance of credit for employer expenses for child care assistance This employer credit is a new business tax credit. The law provides for a credit to employers equal to 25 percent of qualified expenses for child care and 10 percent of qualified expenses for child care resource and referral services (CCR&R), for a total of 35 percent. The maximum credit for a company filing for the credit is set at $150,000. This credit will go into effect in tax year 2002.

Qualified expenses for child care include paid or incurred costs in acquiring, renovating or operating a child care facility. Such a facility must have open enrollment to employees and cannot discriminate in favor of highly compensated employees. Thirty percent of the enrolled children must be dependents of the employer’s employees. Qualified expenses for CCR&R are

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payments made under contract to provide CCR&R services to employees. CCR&R services cannot discriminate in favor of highly compensated employees. CCR&Rs should examine this part of the new tax law carefully and explore the ways in which it can be mutually useful to employers and the CCR&R.

Some Interesting Questions About the New Tax Law How does the tax rebate part of the law work? Taxpayers who paid federal income taxes in 2000 will receive a rebate check in the mail this summer from the IRS: single tax payers will receive approximately $300 and married couples filing a joint tax return will receive approximately $600.00. Families that did not pay federal income tax in 2000 will not receive a rebate check.

Is the tax relief law permanent? Some sections of the law state that they are permanent.

Otherwise, the non-permanent parts of the law will expire on December 31, 2010, and on January 1, 2011, the non-permanent sections will revert to their status at the time prior to the enactment of the law. See Table 2 to see which sections of Title II of the tax are permanent.

Does each section of the law go into effect at the same time. No, the implementation dates of each section of the new tax law go into effect at various times over the next 10 years. For example, the child credit expansion increases gradually over the next 10 years and becomes fully effective at $1,000 on January 1, 2010. However, the Dependent Care Credit applies to taxable years after December 31, 2002. See Table 2 below to see the effective dates for each part of Title II, Tax Benefits Relating to Children.

What’s the difference between a tax credit and a refundable tax credit? To take advantage of a non-refundable tax credit, a family must file an income tax return that shows tax liability from which the credit is deducted. A refundable tax credit is paid to the family that meets the minimum annual earnings requirement and files an income tax return.

How does a parent get more information about the new tax law? Persons who want more information or who need specific advice about how the law will affect their family should be referred to an appropriate tax professional. CCR&Rs are encouraged to discuss with their own accountant or a similar tax professional the ways in which parents and providers can receive help with more detailed information.

What other actions can CCR&Rs take to help parents, providers and employers learn more about the new tax law?

Send a generic letter or memorandum in cooperation with a tax professional that summarizes the sections of the law that are relevant to the recipients. Send the document by email and regular mail to persons who contact the CCR&R and who are on the CCR&R

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database, and to employers in the CCR&R’s service delivery area. telephone number for further questions.

Provide the CCR&R

Box Note #5 NACCRRA will prepare a sample letter for its members to adapt to their situation and post it on www.naccrra.org. A CCR&R organization can adapt the letter and post the information on its own website. As noted elsewhere in this TAP, tax law is complex and all written materials should be reviewed by a tax professional before being distributed. A statement about tax law complexity and the need for professional advice should be included in any written material.

Identify a local tax professional who will work with you in the distribution of materials and who can meet with your staff or with other groups. Check with your own fiscal staff and/or accountant first Invite local business news reporters for newspapers, TV and radio to write an article or segment on the new tax law as it relates to children. Select reporters who are familiar with tax subjects and offer to be interviewed for the articles. Provide names of parents and employers who can be interviewed for the article or news segment.

Schedule a meeting for parents and providers at which a tax professional can explain in greater detail the meaning of the new tax law for people in the audience. Help parents and providers prepare relevant questions to ask the speakers. Download relevant documents from the Internet (see the list at the end of this TAP) to distribute to persons attending the meeting.

Design and co-sponsor a half-day session with corporate staff in your service area that are most likely to be involved or interested in child care. Invite directors and finance people from other child care organizations and programs and include one or more business tax accountants.

Check with your fiscal staff, accountant or tax professional for additional printed information about the new tax law. Some accountants make such materials available to their clients.

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Information About Title II, Tax Benefits Relating to Children Section / Title Sec. 201: Modifications to child tax credit

Sec. 202: Expansion of adoption credit & adoption assistance programs.

Sec. 204: Dependent care credit

Sec. Allowance credit employer expenses child assistance.

205: of for for care

Who is Affected?

Families with children whose annual income is $10,000 or more and who file an income tax return.

Families who adopt a child or children in a given tax year.

Families who have expenses for the care of dependents, including children in child care

Employers who spend on “qualified expenses to acquire, renovate or operate a child care facility or to contract with a qualified …facility (for employees) and “qualified CCR&R expenses

Key Points for Parents & Providers Families must have earnings of $10,000 or more and must file an income tax return.

Expands the adoption credit for all children (not just special needs children) and makes this provision permanent.

Increases the amounts of qualifying expenses; raises the adjusted gross income (AGI) at which maximum credit can be claimed; increases limits on qualifying expenses.

Credit will equal 25% of qualified expenses for facilityrelated expenses and 10%for CCR&R expenses.

Implementation Schedule Credit for 20012004 tax years = $600.

2005-2008 = $700.

2009 = $800 2010 = $1,000

Permanency Status Not stated

Begins in the tax year 2002; some aspects begin in the tax year 2003.

Permanent

Begins in the tax year 2003

Not stated

Begins in tax year 2002 This is a new federal tax provision and should be reviewed carefully by CCR&Rs.

Not stated.

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Sources for Information Box Note #6 NACCRRA provides this list of resources for the use of its members with the reminder that all information on taxes that is given out to clients should be reviewed by a tax professional.

Center on Budget and Policy Priorities (CBPP), www.cbpp.org, “The Changes the New Tax Law Makes in Refundable Tax Credits for Low-Income Working Families,” June 18, 2001.

Children’s Defense Fund (CDF), www.cdfactioncouncil.org, “New Tax Bill Includes Several Provisions Helpful to Low Income Children and Families,” June 19, 2001.

National Women’s Law Center (NWLC), www.nwlc.org, “New Tax Bill Contains Some Important Benefits for Low-Income Families.”

OMB Watch, www.ombwatch.org - check for articles addressing the tax law.

Joint Committee on Taxation, “Summary of Provisions Contained in the Conference Agreement for H.R. 1836, The Economic Growth and Tax Relief Reconciliation Act of 2001,” May 26, 2001, JCX-50-01. To download using Adobe Acrobat, go to http://thomas.loc.gov; then in sequence: www.firstgov.gov; in the field under “Search Government Websites,” enter ‘joint committee on taxation.’ Click on #1, JCT Homepage, then on the eagle. Click on JCT Publications 2001. Scroll down to “JCX-50-01” and click to open document.

“2001 Tax Law Summary” is a brochure that was provided by a certified public accountant (CPA). The brochure is copyrighted by NPI. Check with your tax professional for relevant, low- or no cost materials on the new tax law.

TAP #11 was prepared by Edna Ranck, Ed.D. Director of Public Policy and Research, NACCRRA, with contributions from members of the NACCRRA Policy Team and Finance Office. eranck@naccrra.org