With the high cost of child care in America, it’s no wonder that this was a major issue of concern in the election. During his campaign, Donald Trump released a fact sheet detailing his child care plan. Now that his presidency is solidified, let’s take a look at how the proposals in his plan work and who they will benefit.
There are three main pillars in President-elect Trump’s child care plan. They include guaranteed paid maternity leave, child care tax deductions, and the Dependent Care Savings Account.
First, the guarantee of paid maternity leave represents quite a meaningful milestone. Until now, the United States has been the only industrialized country failing to offer guaranteed paid maternity. Second, the child care tax deductions will be in addition to the current benefits such as Earned Income Tax Credit. Third, the introduction of the Dependent Care Savings Account will provide additional opportunity for American parents to save on costs associated with dependent care.
Guaranteed Paid Maternity Leave
According to a study conducted by the Organization for Economic Cooperation and Development, the United States has been the only industrialized country not to offer guaranteed paid maternity leave. Trump’s child care plan changes this trend and puts a national law in place to provide this much-needed benefit.
Currently, the Family and Medical Leave Act (FMLA) includes a provision that mandates 12 weeks of unpaid, job-protected leave to new mothers. Only a small percentage of companies go beyond that and offer paid maternity leave. According to the Bureau of Labor and Statistics, that number looks like 11%. That leaves over 85% of American mothers with no income during the important weeks following birth or adoption.
Trump’s child care plan guarantees six weeks of paid maternity leave for new mothers. It does so by amending the existing unemployment insurance that employers must carry. What about new mothers who work for companies that don’t offer paid maternity leave? They will be able to collect unemployment insurance during those first six weeks after birth or adoption.
A new mother would receive pay equal to what she would’ve received if she were laid off. This amount is less than a regular paycheck. So, Trump’s child care plan doesn’t make guaranteed maternity leave equal for all workers. It does, however, provide more recourse than was previously available for new mothers in the workplace.
Child Care Tax Deductions
President-elect Trump’s child care plan will rewrite the existing tax code on child care tax deductions. This will allow parents to write off their child care expenses as deductions above-the-line, whether or not they choose to itemize. Parents can deduct eligible child care expenses for up to four dependents under age 13, as long as the parents earn less than $250,000 per year ($500,000 if filing jointly). The maximum deduction amount will be based on the average cost of care in the filer’s state of residence.
To put this deduction into perspective, a family earning $70,000 per year in the 12% tax bracket could see a reduction of $840 in taxes, if it spends $7,000 on child care.
Families with stay-at-home parents will also qualify for the child care tax deduction. This gives parents a little more flexibility in determining which child care scenario works best financially.
Of course, there are low-income earners who don’t pay federal income tax and won’t qualify for this tax deduction. For them, Trump’s child care plan will offer rebates through the existing Earned Income Tax Credit (EITC). Families earning less than $62,400 per year and single parents earning less than $31,200 per year will be eligible for up to $1,200 in child care rebates.
Dependent Care Savings Account
Trump’s child care plan will also introduce Dependent Care Savings Accounts (DCSAs). A DCSA is a tax-favored account used for saving for dependent care expenses. The term “dependents” is defined as children, disabled spouses, and elderly parents.
Under the new president’s plan, contributions to a DCSA are tax deductible. The income and capital gains from a DCSA will be tax-deferred. They also become tax-free when the money is used for eligible care expenses, such as after school programs and in-home nursing.
The maximum annual contribution limit for DCSAs is $2,000. Unlike current Dependent Care Flexible Spending Accounts, unused money in DCSAs will be allowed to carry over year after year. Plus, leftover funds in a DCSA can be used for college education expenses once the child turns 18.
Low-income parents will receive an additional benefit. The government will match 50% of the first $1,000 deposited into a DCSA per year.
This portion of Trump’s child care plan is beneficial for those that have the disposable income to contribute to a DCSA. Although there is the matching component of the plan for low-income parents, it is questionable how many of those parents will be able to find the money to contribute to receive the match.
In addition to these proposals, President-elect Trump’s child care plan also includes incentives for employers to provide child care at the workplace. It also includes provisions for new family- and community-based solutions.
Many may be wondering how these changes will be funded. According to Trump’s fact sheet:
“About two-thirds of the entire Trump tax reform program will offset by the increases in economic activity that accompany pro-growth tax reform, better trade deals, regulatory and immigration reform, and unleashing American energy. The remaining one-third will be offset by minor changes in the current trajectory of spending for federal agency operations, excluding Defense, Veterans, Social Security and Medicare.”
In other words, the funding for the changes outlined in Trump’s child care plan is largely based on projections of outcomes of external factors.
It’s clear that Donald Trump has made child care expenses a significant part of his overall plan for reforming taxes. How much these changes will actually benefit working and middle class Americans depends largely on utilization rates. For example, how many new mothers will actually opt for paid maternity leave under unemployment insurance? How many low-income families will actually take advantage of the Dependent Care Savings Account government match? Time will tell soon enough.
What do you think about the proposed child care benefits and provisions? Sound off below.Topics: Money Management • Taxes