Dependent Care Tax Credits | Distribution of Benefits

Over 35,000 filers received $13.694 million in Minnesota dependent care credits in tax year 2006. Figure 2 shows the percentage of returns in each county that claimed the credit in 2006.

Statewide, 1.4 percent of all returns claimed the dependent care credit in 2006. Pennington County filers were most likely to claim the credit (3.3 percent of filers), and the credit was least likely to be claimed in Carver County (0.8 percent of filers). Residents of the seven-county metro area were somewhat less likely to claim the credit (1.2 percent of filers) than were taxpayers in the rest of the state (1.8 percent of returns), perhaps because personal income tends to be higher in the metro area.

The availability of pre-tax dependent care accounts may affect the percentage of taxpayers who claim dependent care credits, since taxpayers may either use a pre-tax account to pay dependent care expenses or claim the credit, but not both. Employers are not required to offer pre-tax accounts, and they are not available to the self-employed. A 2005 survey showed that 15.2 percent of all Minnesota employers offered pre-tax accounts.15 Larger companies are more likely to offer the accounts than smaller ones (89.1 percent of businesses with 250 or more full-time employees offer pre-tax accounts, as do 71.3 percent of those with 100 to 249 employees, compared to 22.0 percent of those with ten to 49 employees and only 6.8 percent of those with fewer than ten employees). Larger companies are also more likely to be located in cities than in rural areas. Figure 2 also shows cities with populations over 10,000; most are located in counties in which fewer than 2.0 percent of returns claimed the credit.16 Counties in which an above-average percentage of returns claimed the credit are, in contrast, more rural in nature.

The average dependent care credit claimed by Minnesotans in 2006 was for $383. Figure 3 shows the average dependent care credit by county.

Seven-county metro area recipients claimed a slightly higher credit on average than those in the rest of the state—$389 compared to $382. The highest average credit claimed in 2006 was $459 in Pennington County; the lowest was $267 in Lake of the Woods County. The gap between the average credit in the metro area and in the rest of Minnesota has narrowed considerably since 1994, when the average was $355 in the metro, compared to $255 in the rest of the state. The two have come closer together mostly due to an increase in the average for nonmetro Minnesota. The difference between the two parts of the state may reflect the greater availability of pre-tax accounts in the metro area,17 as well as higher child care costs in the Twin Cities. The narrowing of the gap reflects increased child care costs in the nonmetro area and also may indicate a greater availability of pre-tax accounts throughout Minnesota in 2006 compared to 1994.18

Single parents claim more dependent care credits than do married parents and are more likely to claim the credit as a refund.

An estimated 30,200 head of household filers claimed the dependent care credit in 2006, compared to about 7,900 married couples.19 Some married couples may choose to have one spouse work outside the home while the other cares for their children, making them ineligible for the credit. Two-earner married couples may pay for dependent care, but are also more likely to be income-ineligible than are single parents simply by having two paychecks rather than one. Because of this, married couples are more likely to receive the credit as an offset to tax liability rather than a refund, while head of household filers are more likely to receive the credit as a refund.

Under half of the $13.7 million in dependent care credits paid in 2006 went to offset tax liability—$5.3 million—with the remaining $8.4 million paid as refunds.
Figure 4 shows that of the 35,777 credits claimed in 2006, less than half were taken as full or partial refunds of liability. About 35 percent of recipients had no liability at all and received the full credit amounts as a refund, 28 percent had some liability but qualified for a credit that resulted in a refund, and the remaining 37 percent had tax liability that exceeded the credit amount for which they qualified.

Recipients by Refundability of Credit
Recipients by Refundability of Credit

The Minnesota dependent care credit targets its benefits to low- and moderate-income families.

Figure 5 shows that over a third of all Minnesota dependent care credits go to taxpayers with adjusted gross incomes of less than $20,000, and about two-thirds to those with incomes between $20,000 and $40,000.20 In contrast, federal credits tend to go to higher income families (e.g., about 72 percent of all federal credits go to those with incomes over $50,000, with about 22 percent going to those with incomes between $50,000 and $75,000). Two factors explain this divergence. First, the federal credit is not refundable. Families whose incomes are too low for them to owe income tax do not receive the credit. Nonrefundability explains why almost no one with gross income under $10,000 can claim a federal credit. In contrast, about 11 percent of the refundable Minnesota credits go to families with incomes less than $10,000. Second, the federal credit phases down to a minimum amount, while the Minnesota credit phases out entirely. This explains why no one with gross income above $40,000 receives a Minnesota dependent care credit, while about 80 percent of all federal credits go to filers in this moderate-to-high income range. Of the estimated 160,000 federal credit recipients in Minnesota, about 127,000, or about 80 percent, are income-ineligible for the state credit.

Distribution of Dependent Care Credits by Income
Distribution of Dependent Care Credits by Income

Dependent Care Tax Credits | Overview

This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, The Minnesota and Federal Dependent Care Tax Credits, written by legislative analyst Nina Manzi.

15 Employee Benefits Survey, Minnesota Department of Employment and Economic Development and State Society of Human Resource Managers, Spring 2005.

16 The exceptions are Austin (Mower County), Bemidji (Beltrami County), Brainerd (Crow Wing County), Fairmont (Martin County), Mankato (Blue Earth County), Marshall (Lyon County), Sauk Rapids (Benton County), and Worthington (Nobles County).

17 For the most part, parents must choose between a pre-tax account, if offered by their employer, and the dependent care credit. Generally, middle and upper income taxpayers receive a greater tax benefit from using a pre-tax account than from claiming the dependent care credit. Those with incomes in the credit phaseout range will tend to choose a pre-tax account if their employer offers one. This will tend to increase the average credit claimed by metro recipients, who are more likely have access to a pre-tax account. Metro residents with incomes in the phaseout range who would otherwise qualify for a small credit will choose a pre-tax account instead, with the credit more likely to be used by lower income parents who qualify for a higher credit because of the phaseout structure. Outside of the metropolitan area pre-tax accounts may be less available, leading parents in the credit phaseout range to claim relatively small credits and reduce the average credit for nonmetro Minnesota.

18 Department of Revenue income tax samples from 1994 and 1999 do not show a substantial increase in the use of pre-tax accounts. When the sample is projected to the population, it shows the number of filers using pre-tax accounts increasing from 42,000 to 58,500 from 1994 to 1999, and the amount set aside increasing from about $124 million in 1994 to about $179 million in 1999. More recent income tax samples do not provide detail on pre-tax account usage.

19 Distribution between married and head of household filers estimated from the 2006 sample of income tax returns prepared by the Minnesota Department of Revenue.

20 Distribution of federal and state credits by income estimated using the 2006 sample of income tax returns prepared by the Minnesota Department of Revenue.