The 2025–2026 Tax Changes ECE Leaders Need to Understand (and Act On Now)
ECE leaders are navigating rising costs, staffing pressures, and family affordability challenges, most of the time, all at once! The good news: recent federal tax changes create real opportunities for ECE centers, staff, and families. You just need to know where to look and how to act.
Below are the most relevant, new, and immediately impactful tax changes affecting the ECE sector, along with clear next steps for center leaders. We break it down in an easy to follow. What Changed --> Why it Matters --> How Does it Impact those in ECE --> Steps on What to Do.
Check these out. Feel free copy, send to your CPA or put into an AI tool to create an action plan!
1. Enhanced Employer-Provided Childcare Tax Credit (Effective 2026)
What Changed
- Credit increased to 40% of qualifying expenses (50% for small businesses)
- Annual cap raised to $500,000 ($600,000 for small businesses)
- Expanded to include partnerships with third-party childcare providers
- Indexed for inflation
Why This Matters for ECE
This is the single most transformative change for ECE business development. Employers now have a much stronger incentive to partner directly with childcare centers to serve their workforce.
Impact - ECE Centers
- Opens the door to corporate-paid enrollment slots
- Makes employer-sponsored childcare financially viable
- Creates predictable, contracted revenue for centers
Next Steps
- Identify large employers within a 10–20 mile radius
- Create a simple “Employer Partnership” one-pager
- Work with a CPA to ensure your services qualify
- Begin conversations now—contracts can launch this month! (January 2026)
2. Increased Dependent Care FSA Limits (Effective January 1, 2026)
What Changed
- Annual limit increases from $5,000 → $7,500
- Applies to pre-tax payroll deductions
Impact - Families
- Families can pay more of their childcare costs tax-free
- Improves affordability for middle-income families
- Can reduce churn due to short-term financial stress
Next Steps
- Educate families now about the new increase
- Provide a short explainer families can share with their employers
- Highlight FSAs during enrollment and re-enrollment conversations
3. Enhanced Child & Dependent Care Tax Credit (CDCTC)
What Changed
- Credit increased to up to 50% for lower-income families
- Phase-down structure expanded to benefit more middle-income households
- Credit remains non-refundable
Impact - Families
- Improves affordability for families with tax liability
- Helps stabilize enrollment in moderate-income markets
Next Steps
- Share a plain-language summary with families during tax season
- Encourage families to speak with their tax preparer
- Avoid over-promising benefits for very low-income families
4. No Tax on Overtime Pay (Retroactive to January 1, 2025)
What Changed
- Employees can deduct the overtime premium portion
- Up to $12,500 (single) / $25,000 (joint)
- Applies through 2028
Impact - Staff
- Increases take-home pay for teachers and directors
- Improves morale and retention without increasing wages
- Addresses workforce compensation pressure
Next Steps
- Work with payroll to properly track overtime
- Educate staff on how the deduction works
- Ensure accurate W-2 reporting
5. Permanent Paid Family & Medical Leave Credit
What Changed
- Credit of 12.5%–25% of wages paid during leave
- Option to claim credit via insurance premiums
- Shortened employee eligibility window
Impact - Staff
- Makes competitive leave benefits more affordable
- Supports staff retention in a high-turnover industry
Next Steps
- Review current leave policies
- Model cost vs. credit impact with your CPA
- Consider PFML insurance if not already in place
6. Expanded 529 Plan Uses (Effective July 2025 / January 2026)
What Changed
- K–12 annual limit doubled to $20,000
- Expanded eligible expenses include tutoring, curriculum, therapies
Impact - Families
- Creates opportunities for high-quality pre-K and enrichment programs
- Positions ECE centers as part of long-term education planning
Next Steps
- Assess whether your programs qualify
- Educate families who already use 529 plans
- Explore enrichment offerings that align with eligible expenses
7. CCDBG Funding Increase (Proposed)
What’s Happening
- Senate proposal includes an $8.8B increase
- Funding depends on final appropriations
Impact - ECE Centers
- Potential for expanded subsidy access
- Stabilizes enrollment for subsidy-serving centers
Next Steps
- Monitor state implementation closely
- Ensure licensing and compliance readiness
- Advocate at the state level for rapid deployment
These changes reward proactive operators—those who educate families, support staff, and position their centers as essential workforce infrastructure. The biggest wins will go to leaders who act before these policies fully take effect. Now go get those savings for you, your staff and families!!
