Child Care Bill Triples Tax Credit Cap for Businesses and Boosts Family Dependent Care Exclusion to $7,500

The Child Care Availability and Affordability Act is a major tax overhaul aimed squarely at making it cheaper and easier for parents to work. It tackles the childcare crisis from both sides: giving businesses huge incentives to provide care and offering working families a bigger, better tax break for their expenses. Specifically, it raises the Dependent Care Assistance Program (DCAP) exclusion limit from $5,000 to $7,500 and creates a brand-new, refundable tax credit for dependent care.

The Employer Incentive: Why Your Office Might Get a Daycare

Section 2 of this bill takes the existing tax credit for employers who provide childcare and supercharges it. Right now, a business can claim a credit on 25% of its qualified childcare costs, capped at $150,000 annually. This bill doubles that percentage to 50% of costs and triples the cap to $500,000. Think of it this way: for every dollar a company spends on building or running an on-site daycare, they get 50 cents back in a tax credit, up to half a million dollars. This is a massive incentive designed to move employer-provided childcare from a nice-to-have perk to a financially smart business decision.

Small businesses—defined using a five-year average of gross receipts—get an even sweeter deal, with a 60% credit rate and a $600,000 cap. This clarity and boost for small operators (Section 2) could be key to expanding care options beyond large corporate campuses and into smaller industrial parks or business districts. If this works, it could mean shorter commutes and lower costs for employees who currently have to juggle drop-offs far from the office.

Direct Relief: More Money Stays in Your Pocket

For the average working parent, the most immediate relief comes from two places. First, Section 3 raises the amount you can contribute to a Dependent Care Assistance Program (DCAP) tax-free. That limit jumps from $5,000 to $7,500 (or $3,750 if married filing separately). If you’re already using a DCAP, that extra $2,500 you put aside is now shielded from federal income tax, payroll tax, and state tax, which is a significant boost to take-home pay.

Second, Section 4 replaces the old, often-useless dependent care tax credit with a new, much more powerful one (Section 36C). The key word here is refundable. The credit starts at 50% of your qualified expenses—meaning you get 50 cents back for every dollar spent—and it phases down as your income rises above $15,000. The maximum expenses you can claim are set at $5,000 for one dependent and $8,000 for two or more. Since the credit is refundable, if the credit amount is more than the taxes you owe, you get the difference back as a refund check. This feature is crucial for lower- and middle-income families, ensuring they benefit fully even if they have little or no tax liability.

The Fine Print on the Family Credit

To claim this new credit, your expenses must be work-related—meaning you paid them so you could hold a job. The bill includes a helpful provision for non-working spouses who are full-time students or disabled: they are treated as having earned income of at least $250 or $500 a month (depending on the number of dependents) for the purpose of calculating the credit, ensuring families where one parent is unable to work or is pursuing education can still access the benefit. This is a smart detail that recognizes the reality of modern family structures.

However, there are limits: costs for things like overnight camps won't count, and if you use a dependent care center, it has to comply with all state and local regulations for the expense to qualify. Also, expect to provide the Taxpayer Identification Number (TIN) of your childcare provider on your tax return (Section 4), which ensures compliance but can sometimes be a hassle if you use a smaller, informal provider. Overall, this bill is a heavy lift designed to reduce the financial squeeze of childcare, offering substantial relief that should hit the wallets of working parents shortly after enactment.