With the OBBBA becoming finalized on Independence Day 2025, there are several changes for individual taxpayers that may apply to you. A summary of changes related to claiming child dependents is as follows:
Child Tax Credit (CTC) Increase
- Child Tax Credit increased from $2,000 to $2,200 per child, indexed for inflation each year after 2025.
- Permanent phaseout thresholds: $400,000 (MFJ)/$200,000 (All other filers)
- The refundable portion will be increased from $1,400 to $1,700, indexed for inflation each year.
- A Social Security number will be required for the filer(s) and dependent(s).
- No change has been made to the Other Dependent Credit for parents or adult relatives of a $500 non-refundable credit.
Enhancement of Adoption Credit
- Qualified adoption expenses can be taken as a credit up to $17,280, indexed for inflation each year. This increased from $16,810 from the prior year.
- Up to $5,000 of this credit is refundable, and any unused portion of the non-refundable credit can be carried forward up to 5 years.
Changes to Dependent Care (Beginning in tax year 2026)
- Section 129 plans that allow taxpayers to deduct pretax money from their paychecks to pay for dependent care programs have increased from $5,000 to $7,500.
- The dependent care credit increases to a maximum of 50% of qualifying expenses.
- The credit phases out in two steps based on Adjusted Gross Income (AGI):
- First, it decreases by 1% for every $2,000 above $15,000 AGI but will not fall below 35% during this phase.
- Then, for AGI above $75,000 ($150,000 MFJ), it reduces by 1% for every $2,000 ($4,000 MFJ) but will not go below 20%.
Tax changes like these, especially coming mid-year, can be complex to project. If you have questions related to how these changes may affect your tax situation specifically, please reach out to your tax advisor.
