The 2025 reconciliation law, often referred to as the One Bill Beautiful Bill Act or OBBBA, increased the Child and Dependent Care Tax Credit (CDCTC). But recent TPC estimates confirm that relatively few families with children will benefit from these changes.
Almost no low-income families will gain: They didn’t benefit from credit before and they don’t after the OBBBA changes. Instead, nearly 80 percent of the more generous benefit will go to families in the middle and top of the income distribution, who were already eligible under prior law.
Why? OBBBA made the CDCTC formula more generous, but only for some. Moderate-income taxpayers can now offset more child care expenses (up from 20 percent to 35 percent), and some higher-income families also see increases (or will benefit from the law’s expansions of dependent care flexible spending accounts or FSAs, discussed subsequently).
On paper, low-income families can offset more, too (from 35 percent to 50 percent). But the credit remains nonrefundable, so almost no low-income families can actually benefit.
For families who benefit, the boost is modest relative to child care costs
Only about 8.5 percent of families with children will receive a larger credit in 2026 (Figure 1). Middle- and some higher-income families are more likely to benefit, while lower-income families remain excluded.
Among the middle- and upper-income families who see a gain from the OBBBA changes, TPC estimates that their average credit will increase by about $400 (Figure 2). That’s a big jump from the pre-OBBBA average benefit of about $700. But that’s small compared to typical care expenses, which one study estimated were on average about $13,000 for one child.
Since middle- and higher-income families in the middle and fourth quintile are more likely to benefit from the OBBBA changes, most of the benefits of the increased credit tend to be concentrated among these households (Figure 3).
Low-income families remain excluded from the CDCTC after OBBBA
The increase in the CDCTC rate from 35 percent to 50 percent looks generous on paper for the lowest-income families. In reality, it provides no help because the nonrefundable credit cannot exceed a family’s income tax bill.
By the tax code’s design, many low-income families owe little or nothing in federal income tax. That means nonrefundable credits like the CDCTC provide them little to no benefit, regardless of how generous they appear. For example, a low-income family with $3,000 in child care expenses may seem eligible for a $1,500 CDCTC in 2026. But if they owe no income taxes, they actually receive nothing (Figure 4). This despite research showing that low-income families are more likely to struggle to afford child care than families with higher incomes.
Dependent care FSAs still favor higher-income families
TPC’s estimates exclude the impact of OBBBA’s increase to the annual contribution limit for dependent care flexible spending accounts (FSAs).
Employees can now set aside up to $7,500 on a pre-tax basis for care expenses (up from $5,000). Every dollar set aside in these accounts reduces the expenses limit for the CDCTC ($3,000 for one child or $6,000 for 2 or more children). For example, a family with one child that sets aside $3,000 in an FSA ($6,000 if they have two children), has no remaining expenses eligible for the CDCTC.
Only about half of all workers are offered FSAs by their employers, and only about 20 percent of the lowest-income workers. Higher-income workers not only have greater access but also receive bigger tax savings. A married working couple making $250,000 could save more than $700 in additional taxes from the higher FSA limit, for a total tax savings of about $2,200. By contrast, a low-income family might save about half as much—if they have access at all.
A modest step, but much more could be done
The OBBBA changes to the CDCTC are a modest step toward supporting more working families. But to truly help those with the greatest need, policymakers could make the CDCTC refundable, broaden eligible care expenses, and deliver the benefit when families pay for care, not months later at tax time.
