The Minnesota dependent care credit is targeted to low- and moderate-income families, making it easier for them to work. Many low- and moderate-income taxpayers pay a significant portion of their incomes for dependent care. By directing the dependent care credit to taxpayers with incomes below a certain amount ($36,980 in 2009), Minnesota reduces these families’ cost of working.
The authorizing statute does not assign an explicit purpose or goal to the Minnesota dependent care credit. However, the credit may be assumed to have at least two goals:
- To recognize dependent care costs as a necessary expense of working
- To encourage low- and moderate-income individuals to work
The federal dependent care credit is available to all taxpayers, regardless of income. This approach recognizes dependent care expenses as a necessary expense of working. Because the federal credit is nonrefundable (i.e., it can only be used to offset income tax liability and does not benefit those without liability), it does not provide any special assistance for low- and moderate-income individuals to enter the workforce. Most of these individuals have little or no federal income tax liability.
The federal and state income taxes allow taxpayers to deduct most business expenses from taxable income. For example, a taxpayer who runs a business and has employees may deduct the employees’ salaries. Personal or living expenses, by contrast, are not deductible. Rather, individuals may deduct exemption amounts for the taxpayer, spouse, and dependents, reflecting basic living expenses.3 The Minnesota income tax has traditionally classified child care expenses as nondeductible personal or living expenses.4 However, taxpayers with young children in many cases must pay for their care in order to work. To allow some recognition of these “business expenses,” taxpayers may claim both federal and state dependent care credits that partially offset the cost of dependent care.5
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.
3 In addition, a standard deduction or itemized deductions for certain expenses (mortgage interest, charitable contributions, etc.) are allowed.
4 Between 1954 and 1976, the federal income tax allowed an itemized deduction for dependent care expenses. As with any itemized deduction, taxpayers claiming the standard deduction were not allowed the dependent care credit deduction. Minnesota also allowed a deduction for this purpose from 1969 to 1976. The federal and Minnesota dependent care credits replaced these deductions.
5 This “business expense” rationale apparently was the primary justification for enactment of the federal dependant care credit. For example, the Senate Committee Report that accompanied the legislation enacting the dependent care credit cited this as a main reason for the credit and as the justification for eliminating features of the itemized deduction which it replaced, such as denying the deduction to those claiming the standard deduction and limiting it to lower income individuals.
“Treating child care expenses as itemized deductions denies any beneficial tax recognition of such expenses to taxpayers who elect the standard deduction. The committee believes such expenses should be viewed as a cost of earning income for which all working taxpayers may make a claim . . .The committee views qualified child care expenses as a cost of earning income and believes that an income ceiling on those entitled to the allowance has minimal revenue impact, if the allowance is in the form of credit.” (Senate Rep. No. 94-938, 94th Cong., 2d Sess., reprinted in 1976 USCCAN 3565-66. The House Report contained essentially identical language.)