The One Big, Beautiful Bill Act’s Hidden Gambling Tax
July 29, 2025
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- TaxByte
Gambling taxation has changed under the One Big, Beautiful Bill Act with major new implications
4 min read
Tax Byte
The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, represents the most significant update to dependent care tax benefits in over two decades. For the first time since 2001, Congress has enhanced the Child and Dependent Care Tax Credit, while simultaneously increasing Dependent Care FSA limits for the first time since 1986. The OBBBA changes will affect approximately 4 million families.
The legislation addresses a fundamental disconnect between childcare costs and available tax benefits. While childcare expenses have risen dramatically over the past two decades, the supporting tax benefits remained frozen at 1986 and 2001 levels (except for temporary ARPA changes). The OBBBA finally bridges this gap with immediate changes to the dependent care credit and prospective FSA enhancements beginning in 2026.
Enhanced Child and Dependent Care Tax Credit
The OBBBA’s most immediate impact comes through modifications to §21, specifically the credit calculation methodology. The legislation increases the maximum credit rate from 35% to 50% while restructuring the entire income-based phase-down schedule. This creates a uniform 15 percentage point increase for most income ranges, with more modest increases at higher income levels.
Revised Credit Rate Schedule
| AGI Range | Previous Rate | New Rate |
|---|---|---|
| $15,000 | 35% | 50% |
| $17,000 | 34% | 49% |
| $19,000 | 33% | 48% |
| $21,000 | 32% | 47% |
| $23,000 | 31% | 46% |
| $25,000 | 30% | 45% |
| $27,000 | 29% | 44% |
| $29,000 | 28% | 43% |
| $31,000 | 27% | 42% |
| $33,000 | 26% | 41% |
| $35,000 | 25% | 40% |
| $37,000 | 24% | 39% |
| $39,000 | 23% | 38% |
| $41,000 | 22% | 37% |
| $43,000 | 21% | 36% |
| $45,000-$206,000 | 20% | 35% |
| Above $206,000 | 20% | 20% |
Filing Status Requirements
The fundamental filing status requirements remain unchanged under the OBBBA:
- Married couples: Must generally file jointly to claim the credit
- Separated spouses: May qualify as “unmarried” under specific conditions
For families with two or more children claiming the maximum $6,000 in expenses, the enhanced credit rates mean significant dollar increases. For example, a family earning $85,000 with two children previously received a maximum credit of $1,200 but now qualifies for $2,100.
ARTICLE CONTINUES BELOW
Dependent Care FSA Enhancement
Beginning January 1, 2026, the annual dependent care FSA election limit under §129 increases from $5,000 to $7,500, with the married filing separately limit rising proportionally from $2,500 to $3,750. This 50% increase represents the first adjustment to these limits since their establishment in 1986 (except for temporary ARPA changes).
Key Implementation Details
- Previous Annual Limit: $5,000 (unchanged since 1986)
- New Annual Limit: $7,500 (effective January 1, 2026)
- MFS Limit: $3,750 (increased from $2,500)
- Inflation Indexing: Not included in the legislation
The implementation timeline creates both opportunities and challenges for practitioners. While the enhanced credit takes effect immediately for 2025 tax returns, the FSA changes require employers to update their benefit systems. Cafeteria plan documents must be amended, third-party administrators need system modifications, and open enrollment communications should be updated.
Strategic Coordination Analysis
The fundamental coordination rule between FSA exclusions and dependent care credits remains unchanged, but the enhanced benefits create more complexity. The same expenses cannot be claimed for both benefits, making allocation crucial for maximizing overall tax savings.
FSA Payroll Tax Advantage
A critical advantage of FSA elections is the reduction in payroll taxes. FSA contributions reduce wages subject to Social Security (6.2%) and Medicare (1.45%) taxes, for a combined 7.65% FICA savings. This benefit applies regardless of federal income tax liability.
FSA Tax Savings Components:
- Federal income tax savings: FSA amount × marginal tax rate
- FICA tax savings: FSA amount × 7.65%
- Total pre-tax benefit: FSA amount × (marginal rate + 7.65%)
Client-Specific Strategies
Lower-Income Clients (Under $50,000 AGI): For clients earning less than $50,000, the increased standard deduction ($31,500 for married filing jointly, $15,750 for single) significantly reduces tax liability for these families. While this limits the benefit of the enhanced dependent care credit rates (which are non-refundable), it creates a different opportunity through the refundability of the Child Tax Credit.
When the standard deduction and any dependent care credit reduce tax liability to minimal amounts, more of the Child Tax Credit ($2,200 per child in 2025) becomes refundable through the Additional Child Tax Credit (ACTC). The ACTC provides up to $1,700 per child as an actual refund, calculated as 15% of earned income above $2,500.
FSA vs Credit Trade-off
Limitation: The dependent care credit is capped at $6,000 in qualifying expenses for two or more children. Since FSA amounts reduce credit-eligible expenses dollar-for-dollar, electing the maximum $7,500 FSA eliminates all credit eligibility.
Decision Points:
Option 1: Maximum FSA ($7,500), No Credit
- FSA savings: $7,500 × (22% + 7.65%) = $2,224
- Credit: $0 (no remaining eligible expenses)
- Total benefit: $2,224
Option 2: Partial FSA ($1,500), Maximum Credit ($6,000)
- FSA savings: $1,500 × (22% + 7.65%) = $445
- Credit: 35% × $6,000 = $2,100
- Total benefit: $2,545
For middle-income families in the 35% credit rate range, Option 2 provides the highest total benefit, suggesting that maximizing the credit rather than the FSA often produces better results.
Timeline and Action Items
Immediate Action Items for 2025
- Review current estimated tax payments for potential over withholding
- Assess Form W-4 elections for affected clients
- Project 2026 childcare expenses for FSA planning
- Update client communication materials with new credit rates
2026 Planning Considerations
- Calculate optimal FSA election amounts based on projected expenses
- Consider timing of expenses between tax years
- Plan for open enrollment communications regarding increased FSA limits
Documentation requirements become increasingly important with higher benefit amounts. Practitioners should emphasize comprehensive record-keeping, including provider information with name, address, and TIN for all care providers, qualifying individual verification, and clear expense allocation between FSA and credit claims.
Practice Management
The enhanced benefit amounts increase the stakes for proper compliance and documentation. Common pitfalls that practitioners should monitor for include:
- Inadvertent double-claiming of expenses between FSA and credit calculations
- Income threshold monitoring for credit optimization
- Maintaining proper qualifying individual status verification
- Employment requirement compliance for both spouses
The work-related requirements for both spouses remain critical compliance elements that require ongoing verification, particularly for families with changing work situations.