H.R. 2900 — PACE Act

This section redesignates the child and dependent care tax credit (currently section 21 of the Internal Revenue Code, a nonrefundable credit for up to 35% of qualifying employment-related expenses for the care of a child under age 13 or a dependent/incapacitated spouse or dependent) as section 36C and relocates it to subpart C of part IV of subchapter A of chapter 1 (i.e., the refundable credits subpart). (Thus, the credit becomes refundable for taxable years beginning after December 31, 2025.) It makes conforming amendments to update cross-references throughout the code.

This section enhances the Child and Dependent Care Tax Credit by (1) increasing the applicable percentage of qualifying employment-related expenses to 50% reduced (but not below 35%) from 35% reduced (but not below 20%); (2) striking subsection (g) and redesignating subsection (f) as subsection (g); and (3) adding an inflation adjustment—using the cost-of-living adjustment under IRC §1(f)(3) with calendar year 2024 as the base year, rounded to the nearest $50—to the dollar amounts in subsections (a)(2) (expense limits) and (c) (phaseout thresholds). The changes apply to taxable years beginning after December 31, 2025.

This section increases the maximum exclusion from gross income for employer-provided dependent care assistance programs to $7,500 ($3,750 for married individuals filing separately, from $5,000 ($2,500)) for taxable years beginning after December 31, 2025. (As background, these programs allow employees to exclude employer reimbursements for qualifying dependent care expenses, such as child care for children under age 13.) It also establishes an inflation adjustment to the $7,500 amount for taxable years beginning after 2026, based on the cost-of-living adjustment under IRC §1(f)(3) using calendar year 2025 as the base year and rounded to the nearest $100.