The Food Stamp Dependent Care Deduction
Help for Families with Child Care Costs

PDF of this report (38pp.)

March 23, 2010

Key Findings

  • There is no longer a cap on the amount of dependent care expenses that food stamp participants may claim for the dependent care deduction.
  • It appears that many households eligible for the deduction are not claiming it.  In addition, those that do claim it could likely qualify for larger deductions.  As a result, those households are missing out on benefits.
  • Those who are employed, seeking employment, or attending education or training programs may receive the deduction.
  • The deduction is available for a wide range of dependent care arrangements.
  • Deductible child care expenses are not limited to those related to the care of young children.  The costs of any adult-supervised activity provided to dependents of any age, before and after school or when school is not in session, are allowable. 
  • Any actual costs of dependent care are allowable, including:  the cost of care, transportation to and from care, co-payments for subsidized care, unreimbursed payments for care, and fees for unused care.

Introduction

The Food Stamp Program targets benefits according to need. It does this by limiting eligibility to low-income households and by assessing the ability of individual households to purchase food. Households can deduct certain critical expenses from their income. This results in higher benefits, reflecting the fact that these households have less money available to purchase food. One of these deductions is for out-of-pocket dependent care expenses.

For many years, the dependent care deduction was capped at $175 per month per dependent ($200 per infant), well below the out-of-pocket costs that many low-income families must pay for care. The 2008 Farm Bill, however, made numerous improvements to the Food Stamp Program (now referred to as the Supplemental Nutrition Assistance Program [SNAP]), including eliminating the cap on the dependent care deduction.

The law, which went into effect October 1, 2008, allows households to deduct the full amount of eligible dependent care costs incurred. [1] This, in turn, enables households whose dependent care expenses exceed the former caps to receive larger food stamp benefits.

Prior to passage of the Farm Bill, data suggested that, in many states, many low-income working families eligible for the deduction either did not claim it or did not claim the full amount for which

they were eligible. With the elimination of the cap, however, the increase in benefits gained by claiming the deduction may be substantial, making it even more important that all eligible households report their dependent care expenses.

With this in mind, states may want to evaluate policies relating to the deduction and consider whether they reflect the flexibility permitted under federal law and enable eligible households to take the full deduction. The elimination of the cap also provides an opportunity to reach out to the child care community and educate child care agencies and providers about the deduction so that they, in turn, can educate the families they serve. Many low-income families paying for dependent care may not realize that they are eligible for food stamps or that claiming their dependent care costs could significantly increase the monthly food stamp benefits for which they are eligible.

This paper provides information on the dependent care deduction and how states can structure their policies and procedures to ensure that eligible households access available benefits, use the deduction to maximize their benefits, and better manage the high costs of dependent care. It includes technical information on the federal regulations relating to the deduction as well as examples of state policies.

The paper addresses the following questions:

  1. Who may claim the dependent care deduction?
  2. What expenses may they claim?
  3. How can states make the deduction easier for food stamp participants to claim and state agencies to administer?
  4. What outreach opportunities does the deduction present?

Background

For low-income working families with dependent children or adults at home, high-quality, affordable dependent care is a critical support for maintaining employment.[2] Although some low-income families receive assistance in paying for dependent care through child and adult care subsidy programs, have children who attend Head Start, or have satisfactory informal dependent care arrangements with family or friends, many others do not have these options or face substantial out-of-pocket costs, even with assistance.

High Cost of Child Care

According to the U.S. Census Bureau, poor families with employed mothers spend more than four times the percentage of their income on child care as other working parents. For poor working mothers who pay for child care, these costs took up an astounding 32 percent of their monthly cash income in 2006, compared to just 7 percent for all working mothers.[3] The cost of care for one child averaged between $4,055 and $15,895 per year in 2008, depending on where a family lived, the age of the child, and the type of child care. For low-income families, this is a costly expense.[4]

The high cost of dependent care can place great stress on family budgets. In a review of the literature on child care subsidies, the Center on Law and Social Policy concluded that “when families are not able to access child care assistance, they may go into debt; return to welfare; choose lower quality, less stable child care; or make untenable choices in their household budgets.”[5]

One of these choices may be to sacrifice their food security in order to pay their child care costs.

While child care subsidies help defray costs for some low-income families, only a small proportion of eligible families receive them. A recent study found that only 20 percent of low-income families using non-parental child care and living at or below the poverty level were receiving a child care subsidy.[6] In 2008, 17 states had significant waiting lists for child care subsidies, and even this figure does not fully describe the need because many states do not maintain waiting lists.[7] In recognition of the fact that many low-income families face high child care costs, the Food Stamp Program considers these costs when calculating benefits. Maximizing the dependent care deduction can help to defray some of the out-of-pocket child care expenses that may limit participants’ ability to provide nutritious food for their families.

ADULT DEPENDENT CARE

While much of this paper focuses on the impact of the dependent care deduction on families with child care expenses, households may deduct expenses related to the care of adult dependents as well. Thus, the deduction can help working families with disabled, ill, or elderly household members requiring care.

Adult care services provide companionship and supervision to adults who are unable to care for themselves. Such services can be costly: in 2009, an in-home homemaker/companion cost $19 per hour on average, while center-based adult day care services cost $67 per day.a However, these types of services allow aging and chronically ill adults to remain at home and avoid more expensive nursing home care, while allowing their caregivers to continue employment.

While the federal Medicare program pays for many of the medical expenses for the elderly, it does not cover homemaker and adult day care services. In some states, Medicaid, other federal and state public programs, and private insurance may pay a portion of adult day care services. It is likely that many families with adult dependent care needs, however, will face significant out-of-pocket costs.b

People ages 65 and older represented 12.6 percent of the population in 2007 and are expected to represent 19.3 percent of the population by 2030.c With a growing elderly population, adult dependent care expenses will be borne by more families, many of them low-income. It is important that food stamp agencies ensure that eligible low-income families with adult dependents get the full benefit of food stamps, including the dependent care deduction. A recent USDA survey of food stamp data, however, found that fewer than 10 percent of households reported adult dependent care expenses.d

With this in mind, state agencies may want to conduct targeted outreach to families that may have adult dependents and encourage them to apply for food stamp benefits. Additionally, families that do not qualify for the dependent care deduction may be able to benefit from the medical expense deduction.e

a See MetLife Mature Market Institute, Market Survey of Long-Term Care Costs: The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs , October 2009, http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-market-survey-nursing-home-assisted-living.pdf .

b See U.S. Department of Health and Human Services, National Clearinghouse for Long-Term Care Information, Paying for Long-Term Care, http://www.longtermcare.gov/LTC/Main_Site/Paying_LTC/ Costs_Of_Care/Costs_Of_Care.aspx .

c See U.S. Department of Health and Human Services, Administration on Aging, A Profile of Older Americans: 2009, http://www.aoa.gov/AoARoot/Aging_Statistics/Profile/2009/4.aspx .

d See U.S. Department of Agriculture, Food and Nutrition Service Memorandum, Supplemental Nutrition Assistance Program (SNAP): Applications’ Statements about Unreported and Unverified Expenses, November 18, 2009, http://www.fns.usda.gov/fsp/rules/Memo/2010/111809.pdf.

e See 7 C.F.R. §273.9(d)(3).

What Is the Dependent Care Deduction?

Food stamp benefits are calculated based on a formula that assumes that families will spend 30 percent of their net income for food. [8] In order to determine net income, households may deduct certain expenses from their income. These deductions are intended to recognize that households have expenses that limit the amount of funds they have available to pay for food.

To help buffer the impact that out-of-pocket child care expenses can have on family food budgets, Congress in 1980 created a separate deduction in the Food Stamp Program for dependent care expenses.[9] According to federal regulations, dependent care expenses are:

Payments for the actual costs for the care of children or other dependents when necessary for a household member to accept or continue employment, comply with the employment and training requirements as specified under §273.7(e), or attend training or pursue education which is preparatory to employment.[10]

That is, dependent care expenses may be deducted from income when calculating food stamp benefits if they are necessary to enable the participant to work, look for work, or participate in an approved education or training programs.

Dependents need not be related to the household member claiming the deduction. All children under 18 years of age who live with and are financially or otherwise dependent on a member of the household are considered part of the household and may be the subject of the dependent care deduction. This differs from the Supplemental Nutrition Assistance Program Employment and Training (SNAP E&T) program and many state child care subsidy programs, which limit the costs to those associated with the care of children ages 12 and under. Similarly, household members caring for elderly or disabled adults who are financially dependent upon the household member and are not considered to be a separate household may be eligible for the dependent care deduction.[11]

Lifting the Cap on Expenses

Prior to 2008, the maximum dependent care deduction was $175 per month per dependent ($200 for infants). Effective October 1, 2008, the cap was eliminated, making a household’s entire dependent care cost eligible for the deduction. Speaking in support of the change, Senator Tom Harkin, then Chairman of the Senate Committee on Agriculture, Nutrition and Forestry, acknowledged that the cap did not reflect the true cost of child care to low-income families. He made the following statement to the Senate:

The current cap on the dependent care deduction has not been raised in 15 years, but child care costs have continued to grow. Even when a low-income working family gets help paying for child care, the family’s share, or copayment, can be substantial. Now, because of changes in this bill [the 2008 Farm Bill], the amount of food assistance that a family receives will reflect the actual child care costs families pay to be able to hold down their jobs. By lifting the cap, families eligible for the deduction will be able to deduct the full value of their childcare costs, rather than just a portion of the costs.[12]

Deduction Is Underutilized

It appears that many households eligible for the dependent care deduction do not take advantage of it. Of the over 6.3 million food stamp households with children, only 8.2 percent claimed the dependent care deduction, according to an analysis of the fiscal year 2008 food stamp quality control data. Given limited funding for child care subsidies, many more of these families likely have out of pocket child care expenses.

While any household with out-of-pocket dependent care expenses is eligible for the deduction, the group most likely to claim it is single-parent households with young children (under age 5) where the parent is employed. These households are most in need of some form of child care because their children are not yet school age. However, only 37 percent of the roughly 750,000 food stamp households with children under age 5 and working single parents claimed the deduction.

As shown in Appendix I, the percentage of working single parent households with young children claiming the deduction varied significantly among states, ranging from 6 percent in the District of Columbia and Hawaii to 58 percent in North Dakota. (Because the sample sizes in some states were very small, the state-specific figures should be viewed as illustrative; analysis of individual state administrative data would likely result in a more reliable assessment of the share of eligible households claiming the deduction.)

Additionally, a recent USDA analysis of food stamp quality control data found that fewer than 10 percent of households reported child and adult dependent care expenses.[13] Together, these data suggest that many households eligible for the deduction in 2008 did not claim it.

As mentioned above, some low-income working households are able to secure child care through subsidized child care programs, Head Start, or friends or family members who provide free care. Only 20 percent of low-income families using non-parental child care and living at or below the federal poverty level receive child care subsidies, however, leaving a significant number of families that are not receiving a child care subsidy or a dependent care deduction.[14] Although these alternative methods of financing child care would explain why not all food stamp households with young children claim the deduction, it is unlikely that they fully explain the small share of households claiming the deduction.

Eligibility restrictions also fail to explain the underutilization of the deduction, since virtually all food stamp households with a dependent in a care arrangement are potentially eligible for the deduction. According to the regulations, households are eligible if they contain an individual who is employed, looking for work, or attending school or training. Federal regulations place no additional restrictions on the deduction, such as limiting it to households with no nonworking adults. Nor do households necessarily lose the deduction if a household member loses his or her job, because individuals seeking employment also qualify. And, although some households may receive a child care subsidy, they still may have allowable expenses, such as co-payments or transportation costs.

Table 1:
IMPACT OF THE DEPENDENT CARE DEDUCTION ON MONTHLY FOOD STAMP BENEFITS
(Based on a typical household of three with earnings of $1,260 per month and shelter expenses in fiscal year 2010)

Amount of the Dependent Care Deduction

Monthly Food Stamp Benefits

$0

$373

$175

$452

$200

$463

$250

$486

$300

$508

It is possible, in the past, that the low cap deterred households from claiming the deduction. Some families may have decided that the increase in benefits from the deduction was not worth the effort necessary to make the claim. With the recent elimination of the cap, however, the benefit to participants may be much greater than in the past and may improve utilization. Table 1 shows how a larger deduction could affect food stamp benefits for a family of three with typical earnings ($1,260 a month) and shelter expenses.

Before enactment of the Farm Bill, the Congressional Budget Office estimated that eliminating the cap would provide an average of almost $500 a year (more than $40 a month) to approximately 100,000 households whose child care costs exceeded the previous cap. If all food stamp households who are eligible for the deduction claimed it, the number of households that benefit would be substantially greater. [15]

The benefit of lifting the cap can be especially significant for some working families. For example, a single mother of two who works 35 hours a week at $9 per hour and pays $300 a month for child care (the approximate average out-of-pocket cost for a poor, employed mother with a pre-school-aged child[16]) will receive an additional $135 in food stamps each month ($508 rather than $373), or about $1,600 a year by claiming the deduction. (If the $175 cap had remained in place, the additional benefit would have been only $79 per month [$452 rather than $508]). This $135 in additional food stamp benefits offsets nearly half of her $300 in monthly child care expenses.

Given the significant impact on food stamp benefits, it is essential that Food Stamp Program participants have the information they need to claim the deduction. To this end, states may wish to review their policies and procedures to ensure that all eligible households receive the deduction.

Categorical Eligibility

Food stamp rules permit states to raise the gross income limit from the traditional limit of 130 percent of the federal poverty line to as high as 200 percent of the poverty line.[17] About twenty states have taken advantage of this option. [18] Low-income working households with children who have incomes just above 130 percent of the federal poverty line are in the best position to benefit from this option because they can use the dependent care deduction to reduce their net income – often resulting in significant benefits for the households. States may wish to consider raising their gross income tests to expand the reach of food stamps to more low-income working households.

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End Notes:

[1] The 2008 Farm Bill (The Food, Conservation, and Energy Act of 2008, P.L. 110-246) was enacted on June 18, 2008.

[2] See Hannah Matthews, Child Care Assistance Helps Families Work: A Review of the Effects of Subsidy Receipt on Employment, Center for Law and Social Policy, April 2006, http://clasp.org/publications/ccassistance_employentpdf.

[3] See Julia Overturf Johnson, Who’s Minding the Kids? Child Care Arrangements: Summer 2006, Detailed Tables, Table 6, U.S. Census Bureau, http://www.census.gov/population/www/socdemo/child/tables-2006.html .

[4] See National Association of Child Care Resource and Referral Agencies, Parents and the High Price of Child Care: 2009 Update, http://www.naccrra.org/docs/publications/supporting-docs/parents-and-the-high-price-of-child-care-2009-update/executive-summary.pdf .

[5] See Hannah Matthews, Child Care Assistance Helps Families Work: A Review of the Effects of Subsidy Receipt on Employment, Center for Law and Social Policy, April 2006, http://clasp.org/publications/ccassistance_employentpdf.

[6] See Nancy Burstein and Jean I. Layzer, National Study of Child Care of Low-Income Families: Patterns of Child Care Use Among Low-Income Families, Abt Associates, Inc. for the U.S. Department of Health and Human Services, September 2007.

[7] See National Association of Child Care Resource and Referral Agencies, Child Care Subsidy Waiting Lists by State, http://www.naccrra.org/policy/background_issues/ccdbg/subsidy-waiting-lists .

[8] See Center on Budget and Policy Priorities, Policy Basics: Introduction to the Food Stamp Program, http://www.cbpp.org/cms/index.cfm?fa=view&id=2226.

[9] See Amendments to the Food Stamp Act, P.L. 96-249, 94 Stat. 357-370.

[10] See 7 C.F.R. § 273.9(d)(4). The current regulation still contains language referring to the cap, which the 2008 Farm Bill eliminated. This language is obsolete.

[11] See 7 C.F.R. § 273.1(b).

[12] See 154 Cong. Rec. S. 4750 (daily ed. May 22, 2008).

[13] See U.S. Department of Agriculture, Food and Nutrition Service Memorandum, Supplemental Nutrition Assistance Program (SNAP): Applications’ Statements about Unreported and Unverified Expenses, November 18, 2009, http://www.fns.usda.gov/fsp/rules/Memo/2010/111809.pdf.

[14] See Nancy Burstein and Jean I. Layzer, National Study of Child Care of Low-Income Families: Patterns of Child Care Use Among Low-Income Families, Abt Associates, Inc. for the U.S. Department of Health and Human Services, September 2007.

[15] This estimate was before the American Recovery and Reinvestment Act of 2009 added an average of $20 per person to food stamp benefits.

[16] See Julia Overturf Johnson, Who’s Minding the Kids? Child Care Arrangements: Summer 2006, Detailed Tables, Table 6, U.S. Census Bureau, http://www.census.gov/population/www/socdemo/child/tables-2006.html .

[17] See FNS Memorandum, “Categorical Eligibility Questions and Answers”, January 26, 2010. http://www.fns.usda.gov/snap/rules/Memo/2010/012610.pdf

[18] See FNS Materials on Categorical Eligibility, http://www.fns.usda.gov/snap/rules/Memo/2010/121809.pdf, December 18, 2009.

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