The 2025 federal tax law (Public Law 119-21, signed July 4, 2025) made three changes to child care tax benefits that start in the 2026 tax year.1 Families will feel them when they file in early 2027, and employers can use one of them now. Here's what changed, in plain terms, and what it means for a center.
This is a summary of public sources for directors and families. Tax situations vary; a tax professional or the IRS instructions for your return have the final word.
1. A bigger Child and Dependent Care Credit for many families
The credit covers a share of what a family pays for care so parents can work or look for work. The expense limits haven't changed: up to $3,000 for one child or $6,000 for two or more. The percentage of those expenses that counts as a credit went up.12
| Adjusted gross income | Before (through 2025) | From 2026 |
|---|---|---|
| $15,000 or less | 35% | 50% |
| $15,000 to $45,000 | Falls 1 point per $2,000, to 20% at $43,000 | Falls 1 point per $2,000, to 35% |
| $45,000 to $75,000 ($150,000 married filing jointly) | 20% | 35% |
| Above $75,000 ($150,000 joint) | 20% | Falls 1 point per $2,000 ($4,000 joint) until it reaches 20% |
Based on the Congressional Research Service's summary of section 70405. By that description the 2026 rate reaches its 20% floor at about $105,000 of income for single filers and $210,000 for joint filers. The dollar thresholds aren't adjusted for inflation.1
At the top rate, that's a credit of up to $1,500 for one child or $3,000 for two or more. The credit is still nonrefundable, so it can reduce the tax a family owes but won't produce a refund on its own.1 The largest change is for middle-income families: a married couple earning $120,000 moves from a 20% rate to 35%.
2. Dependent care FSAs go from $5,000 to $7,500
Starting in 2026, employees can set aside up to $7,500 a year before tax through an employer's dependent care assistance program, up from $5,000 ($3,750 for married people filing separately). The limit isn't indexed to inflation.13
The two benefits interact. Money excluded from income through a dependent care FSA is subtracted from the expense limit used for the credit.4 Because the new FSA limit ($7,500) is higher than the credit's expense limit ($6,000 for two or more children), a family that puts the full $7,500 through an FSA has nothing left to claim for the credit, however much they spend on care. A family that sets aside less can claim the credit on whatever is left under its limit. Which combination saves more depends on income and tax bracket, so it's worth running the numbers before open enrollment.
3. A much larger credit for employers who help with child care
Section 45F gives businesses a credit for child care they provide or pay for. For amounts paid after December 31, 2025:56
- The credit rate rises from 25% to 40% of qualified child care expenses, or 50% for eligible small businesses (average annual gross receipts of $32 million or less over the prior five years, for 2026).
- The yearly cap rises from $150,000 to $500,000, or $600,000 for small businesses, adjusted for inflation.
- Qualified expenses include paying a licensed child care facility, under contract, to provide care for employees. New: paying an intermediary that contracts with facilities on the employer's behalf also counts, as do facilities owned jointly with other businesses.
That third point is the one for centers. An employer doesn't have to build a child care center to use the credit; it can contract with yours. In a March 2026 Pew Research survey of working parents with children 5 or younger, 59% said onsite child care at work would be extremely or very helpful, but only 7% said it was available to them.7
A business whose principal trade is running the child care facility can only count that facility for 45F if at least 30% of the children enrolled are dependents of its own employees. The facility also has to be open to employees and can't favor highly compensated employees.6 Check this with a tax professional before counting on it.
What this means for your center
Families will ask for tax information. To claim the credit, a family reports each provider's name, address and taxpayer identification number on Form 2441.4 Have your EIN ready and make year-end statements easy to get. Our guide for families on receipts and statements explains what to ask for.
Local employers have a reason to talk to you. A hospital, school district or manufacturer near you can now recover up to 40% or 50% of what it pays you to reserve seats for its employees' children. If you have waitlisted infant or toddler demand you can't serve, or a room you could open with a guaranteed contract, this is worth a conversation.
What to do this fall
- Tell families about the higher credit and FSA limit before open enrollment for 2027 benefits.
- Make sure every family can get a statement with your center's name, address, EIN and their total paid for the year.
- Make a short list of large local employers and whether their staff are on your waitlist.
Sources
- Congressional Research Service. Tax Provisions in P.L. 119-21, the FY2025 Reconciliation Law (R48611), sections 70401, 70404 and 70405.
- 26 U.S. Code § 21. Expenses for household and dependent care services necessary for gainful employment.
- Internal Revenue Service. Publication 15-B, Employer's Tax Guide to Fringe Benefits (2026).
- Internal Revenue Service. Publication 503, Child and Dependent Care Expenses.
- Internal Revenue Service. Employer-provided child care credit: tax year 2026 and later, last reviewed July 23, 2026.
- 26 U.S. Code § 45F. Employer-provided child care credit, as amended by Public Law 119-21.
- Pew Research Center. What are parents' biggest challenges in finding child care?, June 16, 2026.
Sources last read September 16, 2026. Not tax advice.