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Trump's plan to help middle class uses child-care tax breaks

Steven Mnuchin, President-elect Donald Trump's pick for Treasury secretary, said in a Wednesday interview on CNBC's "Squawk Box" that "there will be big tax cuts for the middle class."

The incoming administration would negotiate with lawmakers to prevent taxes from rising on some middle-class families under Trump's proposals by using child-care tax breaks, according to Mnuchin.

"When we work with Congress and go through this, it will be very clear. This is a middle-income tax cut. And the child-care credit is a big aspect of this," he said.

However, about 20 percent of households and more than half of single parents would pay more in taxes under Trump's tax plan even with the child-care breaks, according to an analysis by the Urban-Brookings Tax Policy Center from New York University law professor Lily Batchelder.

Trump's proposal for child-care tax deductions

During the campaign, Trump proposed allowing working parents to deduct from their income taxes child-care expenses for up to four children and elderly dependents.

For a family earning $70,000 annually in Trump's proposed 12 percent tax bracket, with $7,000 in child-care expenses, the deduction would reduce taxes by $840 per year, his campaign estimated.

The deduction would be capped at the average cost of care for the state of residence. People earning more than $250,000 (or $500,000 for married couples filing jointly) would not be eligible.

The plan would also offer rebates to lower-income taxpayers through the existing Earned Income Tax Credit. The Trump campaign estimated a low-income family could save almost $1,200 per year.

"Trump has been flexible on his tax plan. His basic personality is to negotiate and this is a big negotiation." -Roberton Williams, a fellow at the Tax Policy Center

The Trump campaign also proposed creating a dependent care savings account to pay for child-care expenses. Similar accounts, called flexible spending accounts, already exist. However, they are only available through employers and many of these plans require you to spend all your balance each year or you lose it.

Under Trump's dependent care savings accounts, contributions would be tax-deductible and would grow tax-free. Withdrawals aren't taxed as long as you use them for qualified child-care expenses, including traditional child care, after-school programs and school tuition.

To help lower-income parents, Trump has proposed the government will match half of the first $1,000 deposited each year.

High-income families would tend to benefit the most from the dependent care savings account, according to an analysis by Elaine Maag, a senior research associate at the Tax Policy Center. Under the current tax code, most low-income families pay no federal income tax while deductions and exclusions benefit families with higher tax rates more than those with lower tax rates, she finds.

Child-care tax breaks may not prevent tax increases

Even with added child-care tax breaks, some middle-class taxpayers could pay more under Trump's tax proposals.

Trump has proposed reducing seven federal tax brackets to three with rates of 12 percent, 25 percent and 33 percent, and increasing the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married couples filing jointly.

The trade-off is that Trump's tax plan calls for repealing personal exemptions for taxpayers and their dependents as well as the head of household filing status.

If that happens, single parents with dependent children and most married households with at least three dependents would pay more in federal income taxes, according to Batchelder's analysis, even with Trump's child-care tax breaks. (See table below.)

The Trump administration would have to work out some way to keep the head of household status and allow for personal exemptions for those middle-class taxpayers to remain unaffected, said Kyle Pomerleau, director of federal projects at the Tax Foundation.

Congress remains a question mark for any tax reform proposal. While Trump's tax plan is similar to the House Republicans, Senate Finance Committee Chairman Orrin Hatch, R-Utah, has yet to detail his plan.

However, Hatch released a statement to CNBC about the prospects of tax reform in the next Congress: "Achieving more permanency and certainty in the tax code this Congress has helped set the stage for a comprehensive tax overhaul in 2017. In my view, we need a simpler, fairer tax system that promotes savings and investment and puts American job creators at a competitive advantage. This means making the code more efficient for families and individuals."

Whatever happens with tax reform, negotiations between the incoming administration and Congress have just begun.

"Trump has been flexible on his tax plan. His basic personality is to negotiate, and this is a big negotiation," said Roberton Williams, a fellow at the Tax Policy Center.

(Update: This story has been updated to include a statement from Sen. Orrin Hatch.)