The Promoting Affordable Childcare for Everyone Act (PACE Act), H.R. 2900, would overhaul and expand the Child and Dependent Care Tax Credit (CDCTC) and the employer-provided dependent care exclusion. Key changes include making the CDCTC fully refundable (so families can receive the credit as a refund even if they owe no federal income tax), increasing the credit’s generosity by raising the maximum percentage of qualifying expenses (to up to 50% with a floor of 35%), and indexing the credit and related amounts for inflation after 2025. The Act also increases the tax-exclusion for employer-provided dependent care benefits from $5,000 (or $2,500 for separate filers) to $7,500 (with half of that amount—$3,750—applicable for those filing separately), also subject to inflation adjustments beginning after 2026. The bill reorganizes and renames the CDCTC to Section 36C and updates cross-references accordingly, with a phased effective date for taxable years starting after December 31, 2025. Potential impact: Working families with child or dependent care costs would receive larger, more accessible tax relief, including refundable benefits. Employers would have a higher tax-advantaged limit for providing dependent care assistance. The changes would increase government outlays (due to refundability) and require administrative adjustments, including updated filing rules and inflation indexing.
Key Points
- 1Fully refundable Child and Dependent Care Tax Credit: The CDCTC would be redesigned (renamed and relocated to new Section 36C) and become fully refundable, enabling eligible individuals to receive the credit as a refund even if they do not owe federal income tax.
- 2Higher credit rate with a floor: The credit would rise from the current 20–35% range to a 35–50% range, with the maximum being 50% of qualifying expenses and a floor of 35% (so even higher-income families could benefit from a substantial credit, though the exact amount depends on expenses and eligibility).
- 3Inflation adjustments: Beginning in tax years after 2025, the dollar amounts connected to the CDCTC (and related provisions) would be increased annually by the cost-of-living adjustment (COLA), with rounding to the nearest $50.
- 4Increased employer-provided dependent care exclusion: The maximum amount that can be excluded from gross income for employer-provided dependent care assistance would rise from $5,000 ($2,500 for separate filers) to $7,500 (with half of that amount for separate filers, i.e., $3,750), plus COLA indexing after 2026.
- 5Effective dates and cross-reference updates: The changes apply to taxable years beginning after December 31, 2025. The bill also renumbers and updates cross-references (e.g., moving Section 21 to Section 36C) and adjusts related provisions to align with the new structure.