Many large employers offer their employees Flexible Spending Accounts (FSA) as an employee benefit. These accounts allow employees to defer a portion of their salary on a pre-tax basis to an account that can be used to pay for qualified expenses without being taxed on the income. One of the categories of qualified expenses that is commonly used is the deduction for child and dependent care expenses.
The Dependent Care Flex Savings Account increased from a $5,000 maximum per year to $7,500 for 2026. The Dependent Care FSA allows participants, if eligible and offered by the employer, to defer from taxes up to $7,500 towards an FSA to spend towards qualified dependent care expenses for dependents. For some individuals, this could be a 22% to 37% federal tax savings on $7,500. Qualified expenses can include the costs of daycare, before or after school care, or certain summer camps.
This benefit may provide a greater tax benefit than the Child and Dependent Care Tax Credit, a non-refundable federal tax credit, for taxpayers in a higher marginal tax bracket. The Child and Dependent Care Tax Credit offers a credit of 20%, up to $6,000 ($3,000 per dependent) in qualified care expenses with a maximum federal tax credit of up to $1,200. So, it is important to compare the total cost savings of both options to determine whether the FSA or the federal tax credit, to see which one yields the largest tax benefit.
In addition, FSAs are use-it-or-lose-it accounts meaning that any money that is allocated to the account must be used within the plan year (including possible grace periods) or the money will be forfeited.