Tax Break for Daycare Expenses

  • Description
  • Funding History
  • Proposals

The Tax Break for Daycare Expenses (officially known as the "Exemption for Dependent Care Expenses") is a tax break provided by the Commonwealth that allows employers to pay for daycare for the children of their employees using pre-tax dollars. In general, employees and employers qualify for this tax break when a portion of an employee's total compensation package takes the form of child (or dependent adult) daycare that is provided by or is paid for by the employer.

For an employee, this tax break operates by excluding the value of employer-provided daycare from the employee's taxable income. For employers, the value of the daycare can be deducted as a business expense. Further restrictions apply, including a requirement that the value of the daycare services provided not exceed the employee's (or the employee's spouse's) "earned" income. In addition, only the first $5,000 of daycare compensation may be excluded from the employee's taxable income or deducted by the employer as a business expense ($2,500 for a married employee who chooses to file separately from his/her spouse).

This tax break costs the Commonwealth about $15 million annually in forgone tax revenue.

Updated August 2016

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