Tax Updates for Parents and Families

David Thomson, CPA
Jul 15
5 min read

Updated: Aug 29

On July 4th, President Trump signed a major new tax law: the One Big Beautiful Bill Act (OBBBA). This new legislation builds upon the 2017 Tax Cuts and Jobs Act (TCJA) and brings several changes to the tax code.

Parents and Families are Impacted

How will this legislation impact your taxes? In this article, we will review three key changes that impact parents and families. Keep these provisions in mind for tax time!

The Child Tax Credit Gets a Boost

First, what is it?

The Child Tax Credit (CTC) is a federal tax benefit that helps families offset the cost of raising children by providing up to $2,000 per qualifying child under age 17. A portion of the credit (up to $1,600 in 2025) may be refundable, meaning families can receive it even if they owe no taxes. The credit begins to phase out at higher income levels, generally above $200,000 for single filers and $400,000 for joint filers.

Here’s What’s Changing

The $2,000 credit is now permanent
The TCJA had increased the Child Tax Credit from $1,000 to $2,000 per child—but it was set to expire after 2025. That increase is now permanent.
The credit gets a bump
Beginning in tax year 2025, the maximum credit per qualifying child increases to $2,200. Starting in 2026, that amount will adjust each year for inflation.
The refundable portion increases
The portion of the credit that is refundable (i.e., can be paid out even if no taxes are owed) remains capped at $1,400 per child, but that cap will also begin adjusting for inflation starting in 2025.

Important Rules to Know

The phase-out thresholds for the Child Tax Credit remain fixed at $200,000 of Modified Adjusted Gross Income (MAGI) for all taxpayers other than married couples filing jointly, and $400,000 for married joint filers.
Once your MAGI exceeds these thresholds, the credit begins to reduce by $50 for every $1,000 (or fraction thereof) of income above the limit.
Your child must have a valid Social Security number (SSN) issued by the return due date (usually April 15).
On joint returns, at least one spouse must also have a valid SSN.
If the required SSNs aren’t provided, the IRS may disallow the credit and treat it as a clerical error.

When Does This Take Effect?

These updates apply to tax years beginning after December 31, 2024—so you’ll first see them impact your 2025 return, filed in 2026.

✅ Bottom Line: The Child Tax Credit is getting a permanent upgrade and a modest increase. While it doesn’t radically change the credit, it ensures long-term stability and a bit more help for working families with children. If you’re a parent, these changes could make a noticeable difference at tax time.

A Bigger Tax Credit for Child & Dependent Care

What is it?

The child and dependent care credit helps taxpayers who pay for care expenses so they (and their spouse, if married) can work, or look for work. A common example would be daycare or nanny expenses. It’s different from the Child Tax Credit because it focuses on care costs rather than simply having dependents.

How Much Is the Credit Worth?

The credit is based on a percentage of your qualifying care expenses.
You can use up to $3,000 of expenses for one dependent or $6,000 for two or more dependents.

Who Qualifies?

To claim the credit, you must meet certain requirements:

You paid for the care of a child under age 13, a spouse who is unable to care for themselves, or another dependent who cannot care for themselves.
You (and your spouse, if filing jointly) must have earned income from a job or self-employment.
The care provider cannot be your spouse, the child’s parent, or another dependent.

What's Changing?

Starting in 2026, the Child and Dependent Care Tax Credit is getting a significant boost:

The maximum credit rate jumps from 35% to 50%, helping families with lower and moderate incomes.
The phase-out will now happen in two stages, preserving more of the credit for middle-income families before gradually reducing it for high earners.
- Under Tier 1, the credit percentage is reduced by one percentage point for each $2,000 (or fraction thereof) of AGI over $15,000. However, the percentage cannot be reduced below 35% in this phase.
- Under Tier 2, for AGI above $75,000 ($150,000 for joint filers), the percentage is further reduced by one percentage point for each $2,000 ($4,000 for joint filers) over that threshold. This reduction continues until the percentage reaches the statutory floor of 20%.
No matter how high the AGI, the credit rate won’t fall below 20%.
As before, the credit is capped at $3,000 for one dependent or $6,000 for two or more.

Child and Dependent Care Credit (OBBBA, 2026 Rules)

AGI Range (Single filers)	% Allowed	Notes
$0 – $15,000	50%	Maximum credit rate
$15,001 – $43,000	49% → 36%	Tier 1: drops 1% per $2,000 AGI over $15k
$43,001 – $75,000	35%	Tier 1 floor (holds steady)
$75,001 – $103,000	34% → 21%	Tier 2: drops 1% per $2,000 AGI over $75k
Over $103,000	20%	Statutory minimum floor

AGI Range (Joint filers)	% Allowed	Notes
$0 – $15,000	50%	Maximum credit rate
$15,001 – $43,000	49% → 36%	Tier 1: drops 1% per $2,000 AGI over $15k
$43,001 – $150,000	35%	Tier 1 floor (holds steady)
$150,001 – $226,000	34% → 21%	Tier 2: drops 1% per $4,000 AGI over $150k
Over $226,000	20%	Statutory minimum floor

Examples:

You have $5,000 in qualifying expenses at daycare for two kids and your AGI makes you eligible for a 20% credit, you’d receive a $1,000 credit ($5,000 × 20%).
You have $5,000 in qualifying expenses at daycare for one kid and your AGI makes you eligible for a 20% credit, you’d receive a $600 credit ($3,000 × 20%).

✅ Bottom Line: More parents will qualify for a bigger credit—especially those with modest incomes and high care expenses.

More Flexibility with Dependent Care FSAs

What is it?

A Dependent Care FSA (Flexible Spending Account) is an employer-sponsored benefit that lets employees set aside pre-tax dollars to pay for eligible child or dependent care expenses. Because the money is contributed before taxes, it reduces taxable income and lowers federal income, Social Security, and Medicare taxes.

What's Changing?

Beginning in 2026, parents and families can set aside more pre-tax money for child and dependent care expenses through employer-sponsored Dependent Care FSAs (Flexible Spending Accounts):

The annual contribution limit rises from $5,000 to $7,500 (or $3,750 for married filing separately).
Contributions are excluded from gross income, reducing federal income, Social Security and Medicare taxes.

Important Rules

The IRS doesn’t let you “double dip.” That means you cannot use the same dependent care expenses to claim both the tax-free benefit of a Dependent Care FSA and the Child and Dependent Care Tax Credit. Instead, any dollars you run through an FSA reduce the amount of expenses that can qualify for the credit.

✅ Bottom Line: The increased limit helps families with higher annual childcare costs, allowing greater tax-preferred deferral.