A taxpayer with one or more qualifying individuals, such as a child or other dependent, may claim a tax credit for “employment-related expenses” for child and dependent care. Employment-related expenses are expenses for household services and expenses for the care of a qualifying individual (such as daycare). The credit is calculated by multiplying the amount of qualifying expenses (a maximum of $3,000 if the taxpayer has one qualifying individual, and up to $6,000 if the taxpayer has two or more qualifying individuals) by the appropriate credit rate. The credit rate varies by the AGI.

Beginning in 2026, the OBBB increases the maximum credit rate from 35 percent to 50 percent and introduces a two-step phasedown. In the first step, the credit rate is reduced (but not below 35 percent) by one percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s AGI exceeds $15,000. In the second step, the credit rate is further reduced (but not below 20 percent) by one percentage point for each $2,000 ($4,000 for joint returns) by which the taxpayer’s AGI exceeds $75,000 ($150,000 for joint returns).

Example: In 2026, Jane’s AGI is $80,000. She does not file a joint return. Jane’s credit rate is calculated as follows – Step One: initial credit rate of 50 percent is reduced to 35 percent (one percentage point for every $2,000 Jane’s AGI exceeds $15,000 would result in a 33 percent reduction, but the credit rate cannot be reduced below 35 percent in the first step). Step Two: credit rate of 35 percent (from Step One) is reduced to 32 percent (one percentage point for every $2,000 Jane’s AGI exceeds $75,000, resulting in a 3 percentage point reduction). Jane’s final credit rate is 32 percent.

At least one parent and each qualifying child must have a valid Social Security Number to take the child care credit.