PACE Act Hikes Childcare Tax Credit to 50% and Raises Tax-Free Employer Assistance to $7,500, Starting 2026

The Promoting Affordable Childcare for Everyone Act, or the PACE Act, is designed to significantly boost the financial relief available to working families paying for childcare. The core of this legislation is a major enhancement of the Child and Dependent Care Tax Credit (CDCTC) and a substantial increase in the tax-free limit for employer-provided dependent care assistance. While these changes are significant, they won't kick in until tax years beginning after December 31, 2025.

The Tax Credit Gets a 50% Boost

For anyone currently juggling childcare costs and trying to figure out their taxes, the biggest news is the upgrade to the CDCTC. The current credit starts at a maximum rate of 35% of eligible expenses, but the PACE Act bumps that starting rate up to 50%. This is a huge jump. For example, if you’re a family currently claiming $6,000 in eligible expenses for two kids, that higher percentage means more money back in your pocket at tax time. This change is aimed directly at easing the burden of rapidly increasing daycare and after-school costs (Sec. 3).

Crucially, the bill also addresses the silent killer of tax benefits: inflation. Starting in 2026, the dollar amounts used to calculate the CDCTC will be automatically adjusted for cost-of-living increases, using 2024 as the baseline year. This means the credit’s value won't slowly erode over time as the cost of living keeps climbing. If you’re planning your budget years out, this feature adds much-needed stability to the benefit.

More Tax-Free Help from Your Employer

If you use a Flexible Spending Account (FSA) or a similar dependent care assistance program through your job, this bill directly affects your take-home pay. Currently, the most your employer can provide for dependent care on a tax-free basis is $5,000 annually. The PACE Act raises that exclusion limit to $7,500 (or $3,750 for those married filing separately) (Sec. 4).

What does this mean in real terms? If your employer offers this benefit, you can now set aside an extra $2,500 pre-tax for daycare expenses. For a typical working professional, deducting $7,500 from your taxable income instead of $5,000 can save hundreds of dollars in federal taxes alone. Like the credit, this new $7,500 limit will also be adjusted for inflation starting after 2026, ensuring the benefit keeps pace with rising costs.

Technical Cleanup: The Fine Print That Matters

Beyond the dollar amounts, the bill handles some necessary bureaucratic housekeeping. It moves the entire section governing the Child and Dependent Care Tax Credit in the Internal Revenue Code (currently Section 21) and renames it Section 36C (Sec. 2). While this sounds like pure tax-code jargon, it’s actually a sign of technical clarity. Moving the credit to a different part of the code (Subpart C) helps streamline tax administration and requires updating every single cross-reference in the code—from dependent care assistance rules (Section 129) to medical expense deductions (Section 213)—to point to the new location. This kind of cleanup ensures the rules are clear for tax preparers and the IRS alike, even if the changes don't take effect until 2026.