Child care tax breaks underused as costs strain US workforce

Most American employers and their workers are leaving significant federal tax savings on the table, according to a new congressional report.

The new analysis from the U.S. Congress Joint Economic Committee – Minority, which finds that child care tax incentives are chronically underused – even as the average annual cost of care reaches $13,184 per child.

Only 13% of private sector workers have access to employer-provided child care benefits, according to the JEC report. Meanwhile, just 12% of taxpayers with children claim the Child and Dependent Care Tax Credit (CDCTC) – a federal credit that allows families to offset a portion of their care expenses against income tax – despite broad eligibility. 

What the tax credits offer

The JEC report outlines three key mechanisms through which businesses and their employees can reduce the cost of child care.

The first is Section 45F of the Internal Revenue Code – the employer-provided child care tax credit – which allows businesses to deduct 40% of certain qualifying child care expenses from their corporate income tax, up to a cap of $500,000 per year. For small businesses, the deduction rises to 50% with a cap of $600,000.

Despite these potential savings, an analysis of 2016 IRS filing data cited in the JEC report showed that fewer than 1% of corporate returns utilized the 45F credit.

Read more: You client's tax brackets just changed – here's what the IRS just announced

The second mechanism is the Dependent Care Assistance Program, or DCAP, which allows employees to set aside up to $7,500 of pre-tax income annually for eligible care expenses. Less than half of private sector workers have access to a DCAP account, per the JEC report.

The third is the CDCTC itself, which permits families to subtract a portion of what they spend on child care from their federal income tax bill – a $1,050 annual benefit, for example, for a household earning $70,000 with one child paying average care costs, according to the JEC.

The report was released alongside a newly introduced bipartisan bill, the Child Care Tax Benefit Outreach and Assistance Act, led by Senator Maggie Hassan and Senator Dan Sullivan. The legislation would create a dedicated Business Child Care Liaison at the IRS to provide outreach and education to employers about existing credits – a measure that stops short of addressing structural shortfalls in the system but could meaningfully increase uptake.

An overlooked business case

Separate research from Boston Consulting Group and nonprofit Moms First provides financial advisors with a compelling employer-side data set.

The BCG study from 2024 – which drew based on surveys of approximately 1,000 employees and financial analysis at five US companies, including Etsy, Fast Retailing, Steamboat Ski Resort, Synchrony, and UPS – found that every employer studied achieved a positive return on their child care investment, ranging from 90% to as high as 425%. Retaining as few as 1% of eligible employees was sufficient to cover the full annual cost of benefits, the report found.

Inadequate child care costs US employers an estimated $13 billion a year in lost productivity, according to the BCG/Moms First report. Working parents surveyed said they avoided up to 16 absences per year when reliable child care was in place. 

Read more: The economics of raising a family vary wildly across the US; Which state comes out top?

Meanwhile, the 2024 Financial Concerns Report by Lincoln Financial found 68% of surveyed consumers were likely to seek out or discuss ways to pay for childcare. Cutting up the data by generation, it found Millennials were most concerned about childcare costs, with 37% identifying it as a priority.

The problem of childcare expenses could have massive implications for the broader economy, according to figures from the Bipartisan Policy Center cited in the JEC report, which estimate that the lack of affordable and reliable child care will cost the US economy as much as $329 billion over the next ten years.