In 2021, Americans were given many different types of financial assistance from the federal government under the Covid-19 relief provided by the American Rescue Plan Act of 2021, such as unemployment assistance, subsidies for health insurance, expansion of programs providing for children, rental assistance, emergency food programs, and increased funding to states, territories, and tribes to combat the effects of the pandemic.
The signature provision in the assistance-for-children provisions of the American Rescue package was the expansion of the child tax credit, payable to every parent of a child up to age 17. Also expanded in the package was the amount that individuals could contribute on a tax-advantaged basis to a dependent care assistance flexible spending account, or DCFSA, which would pay for child and dependent care expenses. Unfortunately, both these provisions expired after just one year—2021—and Congress needs to enact legislation to restore these benefits into 2022 and later.
The American Rescue Plan Act provided an expanded child tax credit with an annual credit equal to $3,600 for every child under 6 years of age and $3,000 for every child between 6 and 17 years old. This credit would be paid on a monthly basis and, unlike many tax credits, there was no requirement that the family receiving the credit have any income or have any tax liability. Before the expansion, the credit amount was limited to $2,000 for any child under the age of 17, and the credit was phased out for joint-tax filers with incomes above $400,000 and single filers with incomes over $200,000.
In addition, only 70% of the tax credit was refundable; the additional 30% could only be used to offset the tax that was owed. For lower-income people who do not have to pay much, if anything, in taxes, this would limit their tax credit to $1,700. Also, the pre-American Rescue Plan Act credit is available all at once when filing an individual’s tax return, unlike the monthly payment of the child credit made under the American Rescue Plan Act’s expansion. A DCFSA is a tax-advantaged means for a worker to save and pay for the expenses of caring for a child or other dependent while you are working.
The American Rescue Plan Act also provided a one-year increase in the amount that an employee can contribute to a DCFSA to $10,500, or $5,250 in the case of a married person filing separately—up from $5,000, or $2,500 for married person filing separately, where it had been set in 1986 and not been adjusted for inflation since then. An employer can establish a DCFSA for its employees, allowing the employees to reduce their salary—and not pay income and payroll taxes on the salary reduction amount—and that amount will be used on a tax-free basis to pay for the employee’s qualified child and dependent care expenses.
It’s a great benefit for working families who have expenses of caring for their kids. But the value of the benefit has significantly declined over the years since the provision was enacted because the exclusion amount has not kept up with inflation, while child and dependent care expenses have increased. According to the Economic Policy Institute, the cost of childcare in every state exceeds this $5,000 limit.
The increased cost of child and dependent care has been a priority for the Biden administration. The American Rescue Plan Act fixed that problem, but since it was only enacted for one year, the limit on how much that can be contributed to a DCFSA has reverted back to $5,000 in 2022, so the problem remains.
Extension of the American Rescue Plan Act’s child credit expansion and DCFSA increase were initially included as part of the Build Back Better Act, but negotiations with progressive and moderate House Democrats over the Build Back Better Act’s overall cost and scope resulted in the child credit expansion and DCFSA limit increase being dropped; House Republicans opposed the bill. A slimmed-down Build Back Better Act passed the House but lacked enough support from Senate Democrats to overcome a Republican filibuster, and the bill died.
Data shows that the expanded child credit effectively helped children and, for that reason, Congress may come back to look at this policy. Recent analysis by the Center on Poverty and Social Policy at Columbia University determined that the Child Tax Credit reduced monthly child poverty by close to 30%. This analysis validated an earlier one by the Congressional Research Service after the bill passed that projected that the child credit would significantly reduce the level of child poverty.
Congressional Democrats are looking to pass further legislation before the 2022 elections and resurrecting portions of the Build Back Better Act are on the table. Restoring the American Rescue Plan Act’s expanded child credit would be something that would show their interest in helping bring children out of poverty and should be considered. Along with addressing the needs of family at the lower income levels, Congress should include the increase in the DCFSA limit to help middle-income working families afford childcare. Going back to a physical office after working remotely during the pandemic, families are going to find that childcare is more expensive.
Increasing the DCFSA limit is a bipartisan concern. Rep. Cynthia Axne (D-Iowa) introduced the Improving Child Care for Working Families Act of 2021 (H.R. 2121) to permanently increase the annual contribution limit to DCFSAs to $10,500. The bill currently has 21 co-sponsors in the House. Sen. Joni Ernst (R-Iowa) introduced a similar bill, S. 897, in the Senate and it has three co-sponsors.
The problems of caring for family are not going away as we return to the office. In fact, the cost is increasing. This is a concern for all families, regardless of income. Congress should address this issue and revive the provisions of the American Rescue Plan Act expanding the child credit and increasing the annual limit to DCFSAs.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Bill Sweetnam is the technical and legislative director of the Employers Council on Flexible Compensation (ECFC). He previously served as the benefits tax counsel at the U.S. Department of the Treasury and tax counsel at the U.S. Senate Committee on Finance.
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