You Make the Call - Sept. 18, 2025

Question: Casey and Rowan Patel both worked full-time in 2025. They have two qualifying children for care purposes, ages 4 and 7, who lived with them the entire year. They paid $10,200 to Bright Days Childcare so they could both work. Their earned income includes $78,000 from Casey and $52,000 from Rowan.

Casey’s employer sponsored a dependent care assistance program (DCAP), and the couple elected $5,000 through a dependent care flexible spending arrangement (dependent care FSA) (§129). The $5,000 was properly reported in Box 10, Form W-2, Wage and Tax Statement.

Their adjusted gross income (AGI) is $130,000; filing status is married filing joint (MFJ). Assume the children meet the qualifying person tests under §21(b)(1) and both spouses were present in the household all year.

What is the Patels' allowable child and dependent care tax credit (CDCTC) (a) under the 2025 law, and (b) under the new rules in H.R.1 (OBBBA) for 2026, assuming their income and employment stay the same and they still elect $5,000 DCAP?

Answer: With two qualifying children in day care and AGI of $130,000, the Patels’ CDCTC is $200 for 2025 and increases to $350 for 2026.

Using Form 2441, Child and Dependent Care Expenses, first determine the creditable expenses. With two or more qualifying persons, the statutory cap on employment-related expenses is $6,000 each year. Those expenses must be reduced by any employer-provided dependent care assistance excluded from income under §129. With $5,000 of dependent care benefits, the credit base is $1,000 ($6,000 - $5,000) in both 2025 and 2026. For 2025 (pre-OBBBA), the applicable percentage is the minimum 20% for any AGI above $43,000. The Patels’ credit is therefore $200. ($1,000 x 20%)

For 2026, OBBBA revises §21(a)(2). Effective for tax years beginning after Dec. 31, 2025, the applicable percentage becomes 50%, reduced (but not below 35%) as AGI rises above $15,000, and further reduced (but not below 20%) only when AGI exceeds $150,000 on a joint return. With AGI of $130,000, below the $150,000 joint threshold, the Patels use the 35% floor. Their 2026 credit is $350. ($1,000 × 35%)

Report the $5,000 of dependent care benefits in Form 2441, Part III, then compute the credit in Part II; the nonrefundable credit then flows to Schedule 3 (Form 1040). The IRS instructions make clear that Part III must be completed before figuring the credit in Part II and reference Schedule 3 in the credit-limit worksheet.

Practical note for planning: If the Patels increase their dependent care assistance to $7,500 in 2026 (as permitted by OBBBA §70404), their $6,000 expense cap would be fully offset ($6,000 - $7,500 ≤ 0), eliminating any §21 credit; however, the larger §129 exclusion may still be advantageous.