Republican presidential candidate Donald Trump has made tax reform a major part of his campaign toward American prosperity, counting on a variety of tax cuts to spur economic growth. One key aspect of Trump's tax plan involves child care expenses, and Trump would introduce some valuable tax breaks to help parents cover the costs of caring for their children, as well as other family members in need. Below, we'll look in more depth at the Trump tax proposals related to child and dependent care and how they might affect you and your family.
The three main aspects of Trump's child care tax breaks
Trump's tax plan has three primary elements that relate to child and dependent care. First, Trump would introduce provisions that would allow working parents to deduct child care expenses for up to four children or elderly dependents. Second, Trump would enhance the Earned Income Tax Credit for low-income families to give them a more valuable tax break for their child care needs than they would receive from a regular tax deduction. Finally, Trump would create new tax-favored Dependent Care Savings Accounts that would offer tax-deductible contributions and tax-free growth of investments when used for child or elderly dependent care.
These tax provisions fit in with Trump's broader child care policy. In addition to these tax measures, Trump would seek to promote more child care solutions in the workplace, and the presidential candidate would guarantee six weeks of paid maternity leave, with the federal government stepping in whenever employers don't already offer paid leave.
1. Deduction for child care expenses
Trump's plan for deducting child care expenses would allow parents to write off their child care expenses as deductions, presumably in a manner that wouldn't require them to itemize their deductions. In conjunction with Trump's new proposed tax brackets, the deduction would save taxpayers between $120 and $330 for every $1,000 in child care expenses they incurred, depending on their income level. The deduction would only be available to single filers making $250,000 or less, or joint filers with incomes of $500,000 or less.
As an example, Trump said that a family earning $70,000 per year would qualify for the 12% tax bracket under his new tax rate structure. If that family spends $7,000 on child care expenses, then the tax burden would fall by $840, or 12% of what it spent. By contrast, a family earning $240,000 would be in the 33% bracket, and so the same deduction would be worth much more to them -- $2,310 in tax savings.
One key element of the Trump plan is that it would allow stay-at-home parents to get the same tax deduction for child care as working families. That would let families decide the best strategy for providing child care without penalizing them for choosing to have one parent stay at home.
2. Spending rebates for lower-income taxpayers
Obviously, a deduction isn't worth anything for someone who doesn't pay any taxes. With Trump calling for standard deductions of as much as $30,000 for joint filers, many low-income families wouldn't have any taxable income against which to take a deduction.
Therefore, rather than offering a worthless deduction, Trump proposes offering what he calls child care spending rebates to lower-income taxpayers through the Earned Income Tax Credit. By doing so, Trump would expand the refundable tax credit, potentially putting almost $1,200 per year more into taxpayers' pockets for families that are eligible.
3. Dependent Care Savings Accounts (DCSAs)
The final element of the Trump plan would create a new type of tax-favored account for saving for child and dependent care expenses. Under the plan, contributions to DCSAs would be tax deductible, and like an IRA or health savings account, the income and capital gains on investments within the DCSA would be tax-deferred as long as money remained in the account and would become tax-free when used for eligible care expenses. In addition, DCSAs would allow parents to carry unused amounts forward into future years, which is a distinct advantage over the current flexible spending account structure in which participants forfeit unused contributions.
Low-income parents would qualify for an additional break, offering a 50% match on the first $1,000 contributed to a DCSA. This provision would closely match the Saver's Credit provision for IRAs, which offers a similar match for retirement savings.
What the Trump child care tax plan effectively does
Trump's child care tax plan closely resembles what some workers get from flexible spending accounts at work. FSAs allow workers to exclude contributions from income, having the same net effect as a deduction. On top of that, credits for low-income workers arguably make the provisions fairer, and dependent care savings accounts create more incentives to save.
All in all, the biggest difference between the Trump child care tax plan and current law is in how it attempts to treat two-earner couples and one-earner couples equally. Other than that, the measures pay benefits that are quite similar to what the current Child Care Tax Credit structure offers, albeit in a different form.