PACE Act

This bill increases and makes refundable the tax credit for qualified child and dependent care expenses. The bill also increases the exclusion from gross income for employer-provided child and dependent care benefits.

Under current law, a nonrefundable tax credit is allowed for up to 35% (maximum tax credit percentage) of qualified child and dependent care expenses incurred by an individual to work or look for work, up to a maximum amount. The percentage of such expenses allowed as a tax credit may be reduced, but not below 20% (minimum tax credit percentage), based on an individual’s adjusted gross income.

The bill generally increases the tax credit for qualified child and dependent care expenses by

• increasing the maximum tax credit percentage to 50%,
• increasing the minimum tax credit percentage to 35%, and
• adjusting the maximum credit amounts annually for inflation.

The bill also makes the tax credit for qualified child and dependent care expenses refundable.

Finally, the bill increases and adjusts for inflation the amount that may be excluded from gross income for employer-sponsored child and dependent care benefits (e.g., dependent care flexible spending arrangements) to $7,500 (from $5,000).