The 2025 reconciliation law often referred  as the “One Big Beautiful Bill Act” or OBBBA—expanded three child care subsidies in the tax system.

• It increased the child and dependent care tax credit (CDCTC) for some families
• It raised the cap on how much employees can set aside tax-free for care expenses
• It enhanced 45F, a business tax credit that aims to encourage employers to offer child care.

Overall, the changes are relatively modest. They primarily benefit middle- and upper-income families and provide little if any benefits to low-income families who have limited access to other programs to help them afford child care.

Changes to the CDCTC will not help the lowest-income families

The child and dependent care tax credit (CDCTC) is designed to partially offset working families’ child care expenses. Families calculate their credit by multiplying their qualifying care expenses (subject to a limit) by a credit rate that varies with income.

OBBBA made one change to the credit, shown below: It increased the statutory credit rate for low- and moderate-income families. The Joint Committee on Taxation (JCT) estimates this permanent change, which goes into effect in 2026, will cost $9.257 billion between FY2025 and FY2034.

While the credit rate on paper is highest for those with the lowest incomes, and so should result in a larger credit for lower-income families at a given level of expenses— the credit is nonrefundable.

Nonrefundable tax credits are limited by what a household owes in income taxes. And since low-income families tend to owe little or nothing in income taxes, they receive little if any benefit from nonrefundable credits, no matter how generous they may appear on paper. So low-income families will continue to receive only limited benefits from the nonrefundable CDCTC, as seen below.

Some moderate-income families, especially married couples, may receive a larger credit, especially if they earn enough income to owe income taxes (e.g., their income exceeds the standard deduction) and spend enough on care (at least $3,000 in expenses for one child, or at least $6,000 if they have two or more children).

Consider a married couple that has a young child and earns $60,000: Their credit rate will climb from 20 percent under prior law to 35 percent now. If they have $3,000 or more in care expenses, their credit amount will jump from $600 to $1,050.

While this increase will be a welcome change for those who benefit, over time the real value of this increase will decline since the CDCTC is not indexed for inflation.

Generally, the credit applies to care expenses parents pay in order to work. The amount of eligible expenses may not exceed earnings. In the case of a married couple, care expenses cannot exceed the earnings of the lower-earning spouse. An exception exists for married couples in cases where one spouse is working while the other is a student or has a disability.

But the CDCTC cannot be claimed for care expenses paid by a married couple when both spouses are students or have disabilities all year and neither has any earnings, nor by a single parent who is a student or has a disability and has no earnings.

Employees can set aside more of their earnings on a pre-tax basis for child care, if employers offer the benefit

The law increased the amount of pre-tax income businesses can allow their workers to set aside tax-free for care expenses from $5,000 to $7,500, often through a dependent care flexible spending account (FSA). JCT estimates this permanent change, which goes into effect in 2026 will cost $5.973 billion between FY2025 and FY2034. 

The higher amount of child care expenses that can be set aside tax-free will generally reduce the credit amount. This is because every dollar set aside on a pre-tax basis reduces the maximum amount of expenses that can be applied to the CDCTC. If an employee sets aside at least $6,000 of their compensation in their dependent care FSA ($3,000 if they have one child), they will have no qualifying expenses to claim the credit.

Slightly less than half of employees have access to a dependent care FSA through their employers. Available data suggest this benefit will primarily benefit higher-income families who tend to work for larger companies that provide these types of benefits to attract and retain their workforce, and who also receive a bigger tax benefit from an FSA than the CDCTC.  A higher-income taxpayer who sets aside $7,500 of their wages pre-tax, avoiding a 37 percent marginal tax rate, will save $2,775 in taxes (plus they won't pay payroll taxes on the amount they set aside). But the maximum CDCTC they could receive for two eligible children with the same expenses would be just $1,200 (20 percent of the maximum $6,000 of expenses). 

The expanded 45F credit could increase employer-provided care, or provide a windfall to employers who were going to provide it anyway

Finally, the law expanded a tax credit for businesses that provide child care to their employees, often called the 45F credit. JCT estimates these permanent changes, which go into effect in 2026, will reduce revenues by $731 million between FY2025 and FY2034.

These changes address some of the limitations with the credit identified by the Government Accountability Office (GAO) in 2022. The GAO found very few businesses actually used it, so the law increases the financial benefit for businesses that provide child care by making the credit more generous. It also provides more flexibility for the types of expenses and facilities that may qualify.

But the 45F credit still has other limitations. The nonrefundable credit is only available to businesses that owe taxes. Many businesses that aren’t yet turning a profit or are nonprofits that cannot benefit from it. Other businesses may be uncertain whether to invest in providing child care if they don’t know if they will have enough employees who will want it. Some employees might prefer their children to be cared for in their own home (by, for example, a nanny or a family member).

Data from JCT suggest that on an annual basis the law’s changes could triple the cost of the 45F credit in later years. The increased cost of this provision could reflect a true expansion in child care access that would not have otherwise occurred. Or it could reflect a larger windfall for businesses that, even without the credit, would have offered child care to recruit and retain talent.

The OBBBA changes to child care tax benefits largely incorporate changes proposed by Senators Britt and Kaine, except for making the credit refundable. In addition to making the credit refundable, Congress could consider other policy changes to make the credit more accessible to more families.