Candidates’ Proposals on Child Care, Paid Leave, and Taxes

As the country witnesses one of the wildest presidential campaigns in history, the actual policy positions of the candidates can get lost in the day-to-day drama.  As the election nears, we decided to take a look at how the candidates’ positions would affect the finances of our readers and their families.

Below, we look at the major party candidates’ policies on three issues: child care, family leave, and taxes.  With respect to child care and family leave, it may be the first time in recent history that both the Republican and the Democratic candidates have advocated for helping families with childcare expenses and implementing paid leave for new parents.  While Democratic candidates have traditionally advocated for these issues, the fact that the Republican candidate has staked out positions addressing these topics may mean that we’ll actually see some progress in the near future.

Child & Dependent Care

The cost of child care for young children can create an enormous burden on family finances.  The average annual cost of child care now exceeds the average cost of college tuition at a public university.  With both parents working in the vast majority of families, the need for help with child care expenses is a pressing issue.

At the same time, many parents with young children are also bearing the cost of caring for their own parents, which can further strain finances.  Both candidates have put forth positions that would help families with these expenses.

When evaluating the candidates’ proposals, it’s important to understand the difference between a tax deduction and a tax credit.  A tax deduction reduces the amount of income subject to tax.  For example, a deduction of $100 will save a taxpayer anywhere from $0 (if their income is too low to pay income taxes) to $40 (if they are subject to a 40% tax rate).  A tax credit, on the other hand, directly reduces the amount of taxes you owe, regardless of your tax rate.  So a $100 credit provides a tax savings of $100.

Some types of tax credits are “refundable,” meaning they can be claimed even if your income that is too low to pay taxes.  These families receive the credit in the form of a refund check, even though they haven’t paid any taxes.

Current Law

Current law provides the following programs to assist parents with the cost of raising children.

Child Tax Credit.  The Child Tax Credit provides middle class families with a tax credit of $1,000 for each child under the age of 18.  The credit begins to phase out when household income reaches $110,000 for married parents or $75,000 for single parents.

Child and Dependent Care Credit.  This program allows working parents to claim a tax credit for a percentage of qualifying childcare or long-term care expenses.  It provides a credit of up to $600 for families with one child under the age of 13 and $1,200 for families with two or more children under 13.  Households with an income of less than $43,000 may be entitled to a higher credit.  The credit can also be claimed for expenses paid for the care of a disabled dependent, such as an elderly parent.

Hillary Clinton’s Child Care & Dependent Care Plan

Hillary Clinton has advocated for capping child care expenses at 10% of a family’s income.

The core aspects of her plan include expansion of the Child Tax Credit, and universal pre-kindergarten for 4-year-olds.

She has also proposed federal subsidies to the states to increase pay for child care workers    and a tax credit for families who provide care to elderly or disabled relatives.

Expansion of the Child Tax Credit

Hillary Clinton has proposed expanding the Child Tax Credit by $1,000 for each child under the age of 5.  This expansion would be in addition to the current $1,000 tax credit for each child under the age of 18.  Her plan would increase availability of the tax credit for those families who do not earn enough to pay taxes.

Universal Pre-K

Clinton proposes establishing universal pre-kindergarten for four-year-olds.  This would significantly reduce childcare expenses when children turn four.

Federal Subsidies for Child Care

Clinton has also proposed federal funding to states to subsidize the provision of child care.  Such subsidies would be designed to increase the earnings of child care workers and reduce the cost for parents.

 

Caregiver Tax Credit

Hillary Clinton’s plan would create a tax credit of up to $1,200 for expenses paid to care for elderly parents or other disabled relatives.

Donald Trump’s Child & Dependent Care Plan

Donald Trump’s plan to help families with child care expenses is three-pronged.  It would create a tax deduction for child care expenses, expand the Dependent Care Credit, and allow for the creation of tax-free savings accounts.

Income Tax Deduction for Child Care Expenses

Donald Trump has proposed allowing an income tax deduction in an amount equal to the average annual cost of childcare in each state for families with children under the age of 5.  This deduction would be available for both working parents and stay-at-home parents.  The deduction would not be available for households earning more than $500,000 (for married parents) or $250,000 (for single parents).

Low-income families who do not earn enough to pay taxes would receive an expanded tax credit for child care expenses through the Earned Income Tax Credit.

Expansion of Dependent Care Credit

Trump’s plan would expand the current Child and Dependent Care Credit that provides a tax credit for the care of children and disabled family members.  The expanded credit would allow an additional $1,050 for one child and $2,100 for two or more children.

Dependent Care Savings Account

Trump’s plan would allow families to contribute up to $2,000 per year in pre-tax dollars to a Dependent Care Savings Account, which could be used for child care expenses or care for a disabled relative.  Funds in the account could be invested and grow tax-free and would be tax-free when withdrawn.  The funds could also be used for private school tuition.  When the child turns 18, the funds could be used towards college tuition.

The plan would match contributions by low-income families of up to $500.

Parental Leave

The United States is currently one of the only countries in the world without mandatory paid leave for new mothers – the other nations being Suriname and some tiny island countries in the Pacific Rim.

The only federally-guaranteed leave is provided under the Family and Medical Leave Act (FMLA), which allows employees to take up to 12 weeks of unpaid leave per year for medical leave (for themselves or a sick family member) or to care for a new child.  The law applies only to companies with 50 or more employees.  In the past few years, a handful of states have passed laws requiring from four to six weeks of paid leave.

Some companies provide paid leave to parents, but only 12% of private sector workers are covered by such policies.

Hillary Clinton’s Parental Leave Plan

Hillary Clinton’s plan would build on the existing Family Medical Leave Act, requiring such leave to be paid at 2/3 of the employee’s regular salary.  Such leave would be available for all parents, so it would allow a couple to take combined paid leave of 24 months.  Like FMLA, the employee could also take advantage of paid leave to care for a sick child or other family member.

Clinton’s plan would be paid for by raising taxes on higher-income taxpayers.

Donald Trump’s Parental Leave Plan

Trump’s plan would require employers to provide six weeks of paid leave to mothers with new babies.  No leave would not be available to fathers.

Leave would be paid through the existing unemployment insurance system, and employees would be entitled only to the amount paid for unemployment, which varies dramatically by state.  In Arizona, the maximum unemployment payment is $240 per week, and in Massachusetts, the maximum amount is $722 per week.

Taxes

Hillary Clinton’s Tax Plan

Hillary Clinton’s tax plan would impose several tax increases on higher-income taxpayers.

“Fair Share Surcharge”:  Imposes a 4% surtax on income exceeding $5 million.

Limitation on Deductions:  Caps benefit of most deductions (except charitable) at 28% tax rate, reducing the benefit of deductions for those in higher tax brackets.

“Buffett Rule”:  Imposes a minimum tax rate of 30% on taxpayers with income of more than $1 million.

Capital Gains:  Raises tax rates on assets held less than 6 years.

Retirement Accounts:  Limits lifetime contributions to tax-deferred retirement accounts to $3.4 million.

Estate Taxes:  Reduces the current $5.45 million estate tax exemption to $3.5 million and eliminates adjustments for inflation.  Increases estate tax rates to 45% for estates under 10 million; 50% for estates between $10 million and $50 million; 55% for estates between $50 million and $500 million; and 65% for estates in excess of $500 million.

Gift Taxes:  Reduces lifetime gift tax exemption from $5.45 million to $1 million, with no adjustment for inflation.

Capital Gains Basis Step Up:  Under current law, capital gains taxes on assets are eliminated at death, also referred to as an “step-up-in-tax-basis.”  This means that if you inherit an asset, it’s treated for tax purposes as if you purchased it on the date of the original owner’s death.  For example, if your mother purchased IBM stock 40 years ago for $50, and the stock was worth $150 when you inherited it, you can sell if for $150 without paying any capital gains taxes.  If the stock appreciates further, you would have to pay capital gains tax on the increase in value between $150 and the sale price.

Clinton would eliminate this tax benefit for wealthy families.

Donald Trump’s Tax Plan

Donald Trump’s tax plan would eliminate several taxes and reduce taxes for higher-income Americans.

Income Tax Rates:  Reduces the top income tax rate from 39.6% to 33%.

Limitation on Deductions:  Limits itemized deductions to $100,000.

Alternative Minimum Tax:  Eliminates Alternative Minimum Tax.

Net Investment Income Tax:  Eliminates Net Investment Income Tax of 3.8% on dividends and capital gains.

Gift and Estate Tax:  Eliminates gift and estate taxes.

Capital Gains Basis Step Up:  Trump would eliminate this tax benefit after the first $10 million.

The Recap

Despite the differences between the candidates, it’s promising that they are both advocating policies that are more family-friendly than current law.  While any proposals would need to be passed by congress to become law, there appears to be growing support for paid family leave and help with child care, which may put pressure on legislators to enact policies to help ease the financial challenges so many families face.

About the Author

Shannon McNulty

Shannon McNulty is the founder of The Savvy Parents Group and a lawyer in New York City who provides legal planning for parents with young children. Shannon received her J.D. from Georgetown University Law Center and her LL.M. in Taxation from NYU School of Law. She has also earned her CERTIFIED FINANCIAL PLANNER(TM) designation. You can learn more about Shannon and her firm at www.mcnulty-law.com.

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