Ivanka Trump has been personally lobbying lawmakers to include a new deduction for child-care expenses as part of a tax overhaul. One snag: It could cost the government hundreds of billions of dollars.
During her father’s presidential campaign, Ivanka Trump advocated for making child care more affordable and accessible. She helped Donald Trump craft the child care tax plan he released in September. And she advanced a similar outline recently when she joined members of the House and Senate working on a tax proposal in a meeting in the Roosevelt Room of the White House, Bloomberg reports.
A child-care deduction—which could cost $500 billion over 10 years, according to the Tax Foundation—might not make it into any formal proposals as Washington moves ahead with an effort to rewrite the tax system. But among the questions to keep in mind if it does: Would the new feature be in addition to or instead of existing child-care benefits? And how would families of different income levels and circumstances fare under new proposals versus the existing programs?
For instance, the child-care deduction the Trump campaign proposed in September was to be in addition to the current child tax credit and dependent-care flexible spending accounts—and would be available to families with a stay-at-home parent as well as to those paying for child care.
The plan Ivanka Trump wants would allow individuals earning less than $250,000 a year, or married couples earning less than $500,000, to deduct child care expenses from their income taxes—up to the average cost of care in their state, according to the plan introduced in September.
Lower-income families, who would see less benefit from such a tax change because they have less tax liability, would receive a rebate for their expenses—up to $1,200 a year through the earned-income tax credit, Trump’s proposal states.
But how do such proposed changes compare with the child care tax benefits parents can already claim?
Under today’s tax law, each of your dependents can be claimed as a personal exemption on your taxes, reducing your tax burden by $4,050 in 2016. The exemption benefit begins to phase out for individuals earning $259,400 or more, and for couples earning $311,300. However, both President Trump and House Republicans have proposed eliminating personal exemptions and increasing the standard deduction. Under Trump’s tax plan such a change would hurt single filers with more than one child as well as married filers with more than two children, according to an analysis by the Tax Policy Center.
Currently, parents can claim a child tax credit of up to $1,000 for each child under the age of 17, in addition to an exemption. The credit begins to phase out for individuals earning $75,000-plus, or married couples earning $110,000 or more. For each $1,000 you earn above that limit, your available credit is reduced by $50. This means a couple with one child can claim a reduced credit up until they earn $130,000 a year.
Two other benefits apply to parents who pay child-care expenses. One is the child and dependent care credit. This tax break allows you to collect between 20% and 35% of qualifying child-care expenses, depending on your income, up to maximum bills of $3,000 for one child or $6,000 for two or more. That would be a maximum benefit of $2,100.
For higher-earning parents, the more valuable child-care benefit is typically a dependent-care flexible spending account at work, which allows you to set aside up to $5,000 from your pretax pay to cover child-care costs. Any additional expenses above that total can then be used to claim the child care credit. (Trump’s plan calls for the creation of a new Dependent Care Savings Account that would allow any parent to make tax-deductible contributions as well as earn tax-free appreciation.)
The plan Trump has proposed greatly increases the government’s child-care generosity, but the largest beneficiaries of her proposal are high-earning dual-income families relying on paid child care, says Alan Cole, an economist with the Tax Foundation, a politically conservative, nonprofit research group.
For example, a family earning $300,000 would be in the 33% tax bracket this year. Assuming this family paid their state average of $15,000 a year in child care costs, they would be able to deduct the full amount, saving themselves around $5,000 in taxes, says Cole. “People don’t hand out tax cuts like that every day,” he adds. It is unclear how the price of a stay-at-home parent’s care would be calculated for such a deduction.
In September, the Trump campaign suggested that taxpayers would be able to use whichever programs provided the most benefit to them. “The only restriction would be that the same child care spending cannot be used for multiple benefits programs—no double-dipping,” the campaign fact sheet said.
The potentially high price tag of a new child-care deduction—and criticism that the policy is regressive, in delivering the richest benefits to high earners—means the proposal will face a steep climb to approval. It is also not a top priority for House GOP leaders, who did not include child care in their tax-reform plan released in June last year.
However, that doesn’t mean it won’t be part of the negotiations this year: The Trump administration appears very committed to having the cut including in any tax overhaul.