Key Changes to the U.S. Tax Code that Support Child care

Permanent changes to the U.S. federal tax code, enacted through the One Big Beautiful Bill Act (H.R. 1), offer expanded support for child care. These changes provide new opportunities for employers to invest in child care solutions, making quality care more accessible and affordable for working families. The legislation increases the Employer-Provided Child care Credit (45F) to a maximum of $500,000, with an even higher cap of $600,000 for small businesses. It also raises the maximum annual contribution to Dependent Care Assistance Programs and expands the Child and Dependent Care Tax Credit, ensuring families and employers benefit from enhanced child care affordability and accessibility.

Employer-Provided Child Care Credit (45F)

Employer-Provided Child care Credit (45F) allows employers to claim a percentage of qualifying expenses from building, acquiring, and operating child care centers; amounts paid to contract with a licensed child care program (including home-based providers); and costs associated with contracting with a resource and referral service. Key policy changes:

• Credit percentage increases from 25% to 40% (50% for eligible small businesses).
• Maximum credit increases from $150,000 to $500,000 ($600,000 for eligible small businesses).
• Expands qualified expenditures to include costs associated with contracting with a third-party intermediary that contracts with qualified child care facilities for services.
• Expands qualified child care facilities to include jointly owned or operated facilities.

Dependent Care Assistance Program (DCAP)

Dependent Care Assistance Program (DCAP) allows employers to set aside pre-tax income for eligible employees to cover caregiving expenses. Key policy changes:

• Contribution limits increase from $5,000 to $7,500 (individuals/joint filers) and from $2,500 to $3,750 (married filing separately).

Child and Dependent Tax Credit (CDCTC)

Child and Dependent Tax Credit (CDCTC) is a tax credit that helps parents and families pay for care for children 13 and younger and other dependents while they work, seek work, or go to school, with a cap of $3,000 (one qualifying person) and $6,000 (two or more qualifying people). Key policy changes:

• Starting in 2026, the maximum reimbursement rate for the lowest qualifying earners will increase from 35% to 50%. The percentage of reimbursement for qualifying expenses will continue to reduce on a sliding scale, as taxpayers earn more.

Impact on Businesses, Providers, and Families

The One Big Beautiful Bill Act (H.R. 1) represents a transformative step in addressing the critical child care challenges faced by families, businesses, and providers. By enhancing tax credits and programs like 45F, DCAP, and CDCTC, the legislation not only makes child care more affordable and accessible but also fosters a supportive environment for workforce participation and economic growth. These changes empower employers to invest in innovative child care solutions, enabling parents to balance their professional and personal responsibilities effectively. Ultimately, this strengthens the foundations of a thriving workforce and a more competitive, resilient economy by supporting small and large businesses in attracting and retaining a skilled workforce, addressing longstanding child care cost and access barriers, and empowering parents to thrive in their careers.

About the author

Stephanie Ferguson Melhorn

Stephanie Ferguson Melhorn is the Executive Director, Workforce and International Labor Policy. Her work on the labor shortage has been cited in the Wall Street Journal, Washington Post, and Associated Press.

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