OBBB Tax Credit Enhancements for Clients with Kids

Prior to 2018, parents were entitled to claim a dependency exemption for each dependent child. While the 2017 tax reforms suspended the exemption, the OBBB eliminated the personal and dependency exemptions permanently.
The federal child tax credit, however, was increased, from $2,000 to $2,200 per qualifying child under the age of 17 beginning with the 2025 tax year (the change is permanent). The amount will be indexed for inflation beginning in 2026. (Prior to 2018, the child tax credit amount was $1,000.)

The $200 increase applies only to the nonrefundable portion of the tax credit (so a phaseout will begin for taxpayers with $400,000 ($200,000 for single filers) in income.

A Social Security number will now be required for both the taxpayer and the qualifying child.Prior to the OBBB, the child tax credit was available without the need to provide the parent’s Social Security number—so children with non-citizen parents will likely be ineligible for the tax credit even if they previously qualified. An ITIN is no longer sufficient.

On a related note, beginning with the 2025 tax year, up to $5,000 of the allowable adoption credit is refundable (the credit was previously a nonrefundable credit).

Child and Dependent Care Tax Credit

The OBBB will also likely increase the value of the child and dependent care tax credit for many low-income taxpayers. The child and dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses for children under the age of 13. The taxpayer multiplies the amount of childcare expenses incurred by a percentage, depending on the taxpayer's income (prior to 2026, the percentage was 35%, or 20% for parents with AGI in excess of $43,000).

The OBBB increased the percentage of childcare expenses used to calculate the credit beginning with the 2026 tax year. For households with AGI below $15,000, the percentage was increased to 50%.
For households with AGI between $15,000 and $75,000 (single and heads-of-households) or AGI between $15,000 and $150,000 (joint returns), the 50% rate is phased out by 1% for every $2,000 of AGI that exceeds $15,000 (to a minimum of 35%). For households with AGI over $75,000 (single and heads-of-households) or $150,000 (joint returns), the percentage is reduced from 35% by 1% for every $2,000 (single returns) or $4,000 (joint returns) over the threshold amounts (to a minimum of 20%).

Paid Family and Medical Leave Tax Credit

The 2017 tax reform legislation created a new tax credit for employers that provide paid family and medical leave to qualifying employees. The original credit was temporary and, although extended once, was set to expire after 2025.

The OBBB made the Section 45S family and medical leave credit permanent and expanded its scope. Under the TCJA, “Qualifying employees” were those who had been employed by the employer for one year or more and who had compensation that did not exceed 60% of the compensation threshold for highly compensated employees for the prior year.

Under the OBBB, employers can claim the credit for paid leave provided to employees who have been employed by the employer for only six months—thus potentially giving more parents an opportunity to take paid leave to care for a child or other family member.

Conclusion

These legal changes may make existing tax benefits newly available for some clients with families—and create limitations for others. As with other aspects of the law, it’s important to carefully review the details and each client’s unique situation to maximize the value of the OBBB’s tax changes.

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