Minnesota offers a refundable dependent care income tax credit that is limited to people under certain income levels. Minnesota’s dependent care credit is linked to a federal dependent care credit, which is not refundable and not tied to income. This information brief explains the purposes for each of the credits, how they work, how people can claim the credits, and how the benefits have been distributed. It also explains how federal legislation enacted in 2001 expanded the federal credit beginning in 2003.
Minnesota and the federal government provide income tax credits for dependent care expenses.
The federal dependent care credit equals 35 percent of qualifying dependent care expenses for families with incomes of $15,000 or less. The credit percentage phases down to 20 percent for families with incomes over $43,000, but all families qualify, regardless of income. The maximum credit is $1,050 for one dependent and $2,100 for two or more. The federal credit is nonrefundable; that is, it can only be used to offset federal income tax liability. Many low-income families will not receive the full credit because they have too little income tax liability.1
The Minnesota credit is linked to the federal credit, but has a lower maximum, different income limits, and is subject to a complete phaseout. The maximum Minnesota credit is $720 for one dependent and $1,440 for two or more. In tax year 2009, the Minnesota credit begins to phase out when income reaches $23,330, and it is not available to families with incomes over $36,980. Unlike the federal credit, the Minnesota credit is refundable. Thus, a low-income family can receive the maximum credit, even if the family has little or no income tax liability.
In tax year 2006, 35,777 Minnesota income tax returns claimed the dependent care credit, for total credits of $13.7 million. This represented 1.4 percent of all state returns in 2006. Most claimants were single parents: an estimated 30,200 head of household filers claimed the credit in 2006, compared to about 7,900 married couples.2 Under half of the total amount of credits paid—$5.3 million—went to offset liability, with the balance of $8.4 million paid as refunds. About 35 percent of recipients had no liability and received the full credit amount as a refund; 37 percent had liability that exceeded the credit amount for which they qualified. The remaining claimants had some liability but qualified for a credit that resulted in a refund.
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.