Dear Friends,
While we continue to await further action on the budget by our colleagues in the state Senate, I wanted to share a little about one of my bills that sits in the Senate Finance committee.
House Bill 1534 creates an alternate eligibility route for Pennsylvania families that participate in a dependent care FSA to receive the Pennsylvania child and dependent care enhancement tax credit, with the goal of making childcare more affordable for Pennsylvania families.
The Pennsylvania Child and Dependent Care Enhancement Tax Credit is a state tax credit designed to help working families offset the cost of childcare or dependent care. Originally introduced by Act 53 of 2022 and expanded in 2023 through Act 34, this credit is now equal to 100% of the federal Child and Dependent Care Credit, starting with tax year 2023. This means Pennsylvania residents can receive up to $1,050 for one dependent or $2,100 for two or more, depending on their care expenses and income level.
To qualify, taxpayers must first be eligible for the federal Child and Dependent Care Credit, which requires that they paid for care so they could work or look for work. Eligible dependents include children under 13 and disabled spouses or adults who lived with the taxpayer for more than half the year. To qualify, taxpayers must file Federal Form 2441 and Pennsylvania Schedule DC.
Legislators across the commonwealth have been very proud of this legislation to improve access to childcare and make it more affordable for families with members of both sides of the aisle touting this success. Shortly after the Pennsylvania credit was introduced, I realized while doing my taxes that I did not actually qualify, despite having qualifying expenses and meeting the income limitation. This is because I use a Dependent Care Flexible Spending Account (FSA) which allows me to use pre-tax dollars to cover childcare expenses, allowing me to lower my tax burden and better plan for childcare costs. In 2024, the annual contribution limit was $5,000 per household ($2,500 if married filing separately), and the tax benefit was spread out over the year since contributions were deducted from each paycheck.
The reason having an FSA for my federal taxes was prohibiting me from qualifying for the Pennsylvania Child and Dependent Care Enhancement Tax Credit is because of how the state and federal forms interact. Those who take an FSA, especially if they have one child, never reach the line on their Federal Form 2441 that the Pennsylvania Schedule DC draws from, making it impossible to get the credit even if the otherwise fully qualify.
Unwittingly, we had created two classes of qualifying taxpayers at the state level: those who could get the state tax credit and those who could not because they have a FSA for their federal taxes, and this was simply a byproduct of how the tax forms interact.
When I reached out to the Pennsylvania Department of Revenue regarding the issue, presuming that if it happened to me it was happening to more families, they told me I needed to amend the Pennsylvania Child and Dependent Care Enhancement Tax Credit which is what I did. If HB 1534 becomes law, 24,000 qualifying Pennsylvania families will now be able to get the relief they need to help offset childcare costs.
Our tax code should be reflective of the needs of Pennsylvania families and absurdities like mismatching forms should never get in the way of working families accessing programs that can benefit them. This simple change, which creates an alternative method of qualification, will save these families between $600 and $2,100.
House Bill 1534 passed the House 128-75 and now sits in the Senate Finance Committee. I am proud to help offer another solution to help families pay for childcare beyond my work last year that created tax credits for businesses that help cover employees’ childcare costs via the Tax Code. However, there is much more to be done to help stabilize this industry and help Pennsylvania families go to work knowing their kids are in a safe, good quality learning environment. While vital to families, this issue is also vital to our economy. A U.S. Chamber of Commerce report estimates that Pennsylvania loses $3.47 billion annually as a result of childcare breakdowns. Not only must we ensure that access to affordable childcare does not backslide, but we must also make investments in this industry to help families and businesses recoup some of that lost earning potential. I will keep you posted on how this bill progresses through the Senate and share updates on whether the senate takes action on the budget.