The Child and Dependent Care Tax Credit

The child and dependent care tax credit (CDCTC) can help partially offset child and dependent care expenses incurred by working families for the care of a qualifying individual. A qualifying individual can be either a dependent child under age 13 or an older dependent or spouse physically or mentally incapable of self-care, although almost all the CDCTC is claimed for the care of children under 13 (Boyle, Crandall-Hollick, and McDermott 2021).

The credit is calculated as a share of the first $3,000 of care costs paid for one qualifying individual ($6,000 if the taxpayer has two or more qualifying individuals). To calculate the credit, families multiply their care expenses (subject to the cap) by a credit rate that is more generous for those with lower incomes.

Families with adjusted gross income (AGI) at or below $15,000 are eligible for the maximum 50 percent credit rate. That rate falls by 1 percentage point for each additional $2,000 of income (or part thereof) above $15,000 until it reaches 35 percent for families with AGI of more than $43,000 but not more than $75,000 if unmarried or $150,000 if married and filing jointly. After that, the credit rate declines by 1 percentage point for each additional $2,000 ($4,000 if married) of AGI (or part thereof) until it reaches its minimum level of 20 percent when their income is more than $103,000 ($206,000 if married).

The credit is nonrefundable so it can only be used to offset federal income taxes owed—in other words, any excess credit beyond taxes owed is forfeited. As a result, low-income families who owe little or no income tax receive little benefit from the credit (figure 1)

Care expenses generally only qualify if they are incurred so that the taxpayer (and if married, their spouse) can work. Expenses claimed for the credit cannot exceed earned income, or if married, the earned income of the lower earning spouse. For married couples, there is an exception to this rule if one spouse cannot work because they are disabled or a student. In these cases, the spouse's earned income is assumed to be $250 per month ($500 if there are there are two or more qualifying individuals).

The Urban-Brookings Tax Policy Center estimates that in 2026, 13 percent of families with children will benefit from the CDCTC. Some families with children do not benefit because they did not have child care expenses or, in the case of married couples, only one partner works or goes to school (figure 2).

Among families with children who benefit from the CDCTC, taxes were reduced by an average of $890 (figure 3).

The only income quintile in which families’ average benefits substantially differed was the lowest (figure 3). Not only were their child care expenses likely to be lower than those of families in higher-income quintiles, they are typically unable to benefit from the credit because the CDCTC is nonrefundable.

Employer Exclusion: Flexible Spending Accounts

Employer-sponsored child and dependent care benefits include amounts paid directly for care, the value of care in a day care facility provided or sponsored by an employer, and, more commonly, contributions made to a dependent care flexible spending account (FSA). Employees can set aside up to $7,500 of their salary per year on a pre-tax basis under the exclusion (regardless of the number of children). The money set aside is not subject to income or payroll taxes . Unlike the CDCTC, though, which requires both partners in a married couple to work to claim benefits, only one parent must work to claim this benefit.

Dependent care FSAs are the most common form of this benefit. FSAs are subject to annual “use or lose” rules, whereby amounts in the accounts at the end of the year are generally forfeited by the employee (Boyle and Crandall-Hollick, 2020). In 2024, 46 percent of civilian workers had access to a dependent care FSA (Bureau of Labor Statistics 2024). Lower-income workers are less likely to have access to an FSA than higher earners.

Interaction of CDCTC and FSAs

Every dollar of care expenses excluded from income reduces the care expense cap for the CDCTC. If a family sets aside $4,000 in a dependent care FSA for their two young children, for example, the maximum amount of expenses they can apply when calculating the CDCTC is $2,000 ($6,000 cap - $4,000 in the FSA). If a family sets aside the maximum amount in a dependent care FSA ($7,500), they will have no allowable expenses for the CDCTC.

Higher-income families generally benefit more from the exclusion than from the credit because the excluded amounts are not subject to income and payroll taxes. Most higher-income families with child care expenses qualify for a credit of 20 percent of their eligible expenses. The combined tax savings from each dollar of child care expenses excluded from federal income and payroll taxes generally exceedsthis. The exclusion is only available to taxpayers whose employers offer this benefit.

Neither the CDCTC nor the exclusion are indexed for inflation. Thus, each year, the real (inflation-adjusted) value of benefits from the two provisions erodes.

Recent Legislative Changes

In 2025, the law commonly referred to as the “One Big Beautiful Bill Act” (OBBBA) increased the CDCTC credit rate for households with AGI of $103,000 or less if unmarried ($206,000 if married filing jointly). Many lower-income families did not benefit from this change because the credit remained nonrefundable. The law increased the maximum credit rate from 35 percent to 50 percent. As under prior law, this higher credit rate phased down as income increased. But as a result of the changes of OBBBA, the higher credit phases down over a longer income range than under prior law, especially for married couples. Many moderate-income taxpayers eligible for a 20 percent credit rate under prior law are now eligible for a 35 percent credit rate, The minimum credit rate remains 20 percent for the highest income families.

The law also permanently increased the maximum amount of expenses for employer-sponsored child care that could be set aside on pre-tax basis from $5,000 to $7,500. These changes become effective in 2026.

In 2021, the American Rescue Plan Act, expanded the child and dependent care tax credit (CDCTC) to temporarily provide a refundable credit of up to 50 percent of child care costs for a child under age 13 or any dependent physically or mentally incapable of self-care. Eligible child care expenses were limited to $8,000 per dependent (up to $16,000 for two or more dependents). After 2021, the credit returned to being nonrefundable and the maximum credit rate returned to 35 percent. Eligible child care expenses were once again limited to $3,000 per dependent (up to $6,000 for two or more dependents).

For 2021, there was a two-part phase-out for the 50 percent credit rate. Families with adjusted gross income below $125,000 qualified for the full 50 percent credit. That CDCTC rate then fell by 1 percentage point for each additional $2,000 of adjusted gross income (or part thereof) until the rate reached 20 percent (at $183,000 of income). Under the second part, the credit rate was reduced from 20 percent to 0 percent by one percentage point for each additional $2,000 of adjusted gross income (or part thereof) above $400,000 of adjusted gross income. The credit was fully phased out at $438,000 of adjusted gross income. After 2021, only the first part of the phase-out applies, the credit rate is not reduced below 20 percent.

Updated August 2025