In this tax-cut season's second bow to working spouses, Democrats on the House Ways and Means Committee sweetened their bill this week by proposing an increase in the maximum child-care credit from $800 to $1,200 beginning next year.
The credit, which is usually claimed on less than 5 percent of all tax returns, would be raised from 20 to 25 percent of household expenses incurred for the care of children under 15 or for care of an older dependent or a spouse physically or mentally incapable of self-care. Expenses for care of children outside the home, such as in day-care centers or private preschool programs, also would qualify.
The limit on such expenses for the credit would also be increased, from $2,000 to $2,400 for one child or dependent and from $4,000 to $4,800 for two or more.
The credit could be claimed by single parents. It also could be claimed by a couple filing jointly, but only if both spouses work or one is incapacitated. In every case, expenses claimed for calculating the credit could not exceed the earned income of the spouse with the lower of the two incomes.
This fiscal year, the credit will save taxpayers just over $1 billion. The Ways and Means changes would add about $350 million to that tax savings. t
The Ways and Means Democrats have also proposed reducing the so-called marriage penalty, under which two workers pay higher taxes if married than they would if single. The Senate Finance Committee also has included such a reduction in its version of the tax bill.
The justification for the child-care credit is that the expenses are part of the cost of holding a job and bringing in income. There are other such costs, howver, for which the tax code does not make allowance, for example, the cost of transportation to and from work. Most such deductions, such as for union dues, uniforms and tools, are more closely tied to the requirements of a specific job.
From 1963 until 1975, a child-care deduction rather than a credit was allowed. For most of those years the deduction was limited to very low-income taxpayers and virtually no one claimed it.
When it was liberalized, the income test was dropped altogether and expenses of $200 a month for one child or dependent person, $300 for two and $400 for three or more could be deducted.
When the deduction, which was available only to taxpayers who itemized deductions, became a credit in 1976, more people began to use it, but many taxpayers found the tax credit of less value than the deduction had been.
In 1978 a restriction on counting payments to some close relatives including grandparents as expenses was lifted. Now a taxpayer can pay anyone under the age of 19, other than his own child, or anyone the taxpayer claims as a dependent and the expenses still qualify so long as Social Security taxes are paid on the wages.