Election Blog From TaxVox: Trump’s child care tax breaks would mostly benefit families who need them the least
Elaine Maag
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This post originally appeared on TaxVox.

With great fanfare, Donald Trump has proposed a new plan to help families pay for child care. However, the proposal, which is a revised version of an idea he rolled out in August, would mostly benefit high-income families who need government child care subsidies the least. For those who need it the most, such as low-income married couples with a single earner, there is much less to Trump’s plan than meets the eye.

His plan has three major pieces: a child care savings account, a new deduction that could even help high-income families with no paid child care, and a separate credit for some low-income families.

First, let's look at the dependent care savings account. Yes, we already have one in the tax code, although few people use it. Firms offer the plans to less than one-third of all US workers. High income families tend to benefit the most. (Middle income families tend to benefit from the child care credit and low-income families benefit from neither.)

Trump wants to double-down on the savings account idea, however. Families can contribute up to $2,000 per account – even if a child has not yet been born. No other tax-advantaged savings plan would be as generous. Contributions would not be taxed and accounts would grow tax-free. It would be like the best of a traditional IRA and a Roth IRA wrapped into a single account.    

Some very high-income families will be very excited about this new tax shelter. But while low-income families could get a match of up to $500 on a $1,000 contribution, Trump has left out many key details such as when the government would make the match and how long a worker would have to keep the money in the account in order to qualify. Some low-income families, presumably, would not have enough money to take advantage of these accounts. Plus, those facing very low tax rates would receive little tax benefit from the accounts.

Next, Trump is proposing an above-the-line tax deduction for child care expenses. The maximum deduction would be based on the average cost of child care in the taxpayer’s state. (No, we do not know if this calculation would vary by age of child – a large factor in determining actual costs.)

It makes some sense to avoid taxing people on expenses associated with going to work. But Trump’s plan would also give a deduction to parents who incur no child care costs.

The way Trump has designed his plan, benefits from the deduction would go disproportionately to high-income families. For starters, many low-income families already pay no federal income tax. Their income is below their standard deduction and personal exemptions or they already have credits that offset their taxes owed. Thus a new deduction does nothing to raise their after-tax income.

If they do owe income tax, they pay at the 10 or 15 percent rate, and the deduction saves them just 10 or 15 cents on the dollar. For a top-bracket taxpayer, a deduction reduces their tax liability by 39.6 cents on the dollar.

To address that problem, Trump offers the third piece of his plan, a special benefit for very low-income families that would increase an eligible family’s EITC by almost $1,200 per year.

As explained here, families would get a credit worth up to half of the payroll taxes paid by the lower-earning parent. This is important. While the campaign makes a point of saying the deduction goes even to stay-at-home parents, it's not so for low-income couples where one parent stays at home.

Keying the credit to the lower earning spouse means that if you’re low-income and one spouse doesn’t work – you get no credit (since the lower-income spouse owes $0 in payroll taxes). The campaign says if you are eligible as a single parent or a family with two working parents and earn $31,200 – you would get the maximum credit of $1,200. That’s a credit of a paltry 3.8 percent – hardly enough to make a dent in child care costs.

I already lament the confusing nature of the two child care tax benefits we currently have. And Trump would add three more.  

Finally, no column on child care tax benefits would be complete without mentioning that childcare costs are typically incurred over the course of the year. Thus, a benefit that doesn’t come until taxes are filed offers little help to cash-constrained families. Trump might be talking about helping people pay for child care, but higher income families clearly stand to gain a lot more than their low-income peers.

Research Areas Families Taxes and budgets Children and youth
Policy Centers Urban-Brookings Tax Policy Center