A flexible spending account (FSA) is an elective benefit offered by many employers. There are generally two types: the FSA for healthcare expenses, and the FSA for dependent care expenses. This is part two of a two-part series. Here I describe the dependent care flexible spending account. You’ll find my post on the healthcare FSA here. The Health Savings Account is an entirely different animal, and not to be confused with flexible spending accounts.
Dependent care flexible spending account
The Dependent Care FSA is a great way to fund, on a pre-tax basis, childcare expense incurred so that the parent can go to work. There are several requirements to use this benefit: you must claim the child as a dependent on your tax return and the child must be under age 13. Thanks to the One Big Beautiful Bill Act, the maximum tax-free reimbursement under a dependent care FSA has increased to $7,500 per year for. For married couples filing separately, the limit is $3,750. If married, both spouses must work in order to benefit. There is an exception if the non-working spouse is a student or disabled. If one spouse earns less than $7,500, the benefit is limited to the earnings of that lower-earning spouse.
What are the eligible expenses?
There are many. Before and after-school care, but not tuition expenses. Care of an incapacitated adult who lives with you at least eight hours per day. Childcare at a day camp, nursery school, or by private sitter. Late pick-up fees covered. Expenses for a housekeeper whose duties include childcare. Summer day camps, including registration expenses. Activities in lieu of daycare, such as lessons.
What’s not covered? Tuition, primarily. Late payment fees, as opposed to late pick-up fees (above). Overnight camps. Field trips, clothing, and food. Transportation to and from the care provider. Expenses for any child age 13 or older.
Other warnings
- The use it or lose it rules apply more strictly to the dependent care FSA than to the healthcare FSA. There is no carryover available – unlike the healthcare FSA, which permits up to $680 carryover for 2026. Any amounts forfeited to the company become taxable.
- Amounts distributed from a dependent care FSA reduce the amount of eligible expenses used for the dependent care credit. For 2026, that credit is up to 50% of eligible child care expenses (up from 20% previously for most taxpayers) – up to $3,000 for one qualifying dependent or $6,000 for two or more, for a maximum credit of $3,000. The credit percentage phases down gradually from 50% for those with AGI under $15,000 to 20% for those with AGI above $105,000 (single) / $210,000 (joint). If you withdraw $7,500 from your dependent care FSA, you must subtract that $7,500 from your other eligible dependent care expenses when calculating your credit. If your FSA covers all eligible expenses, there may be nothing left to claim for the credit – so the FSA vs. credit calculation is worth running with your tax advisor.
How to take advantage?
Clearly this is a terrific benefit for someone with children 12 and under. If you know, for example, that you pay $600/month for childcare, that’s $7,200/year – close to the new $7,500 maximum. Rather than paying for it all with after-tax dollars, send up to $7,500 to the dependent care FSA and reimburse yourself from there. If you’re in a 24% marginal bracket, your tax savings on the full $7,500 are $2,381.25 from both income and payroll taxes (24% + 7.65% = 31.65%). For higher earners, the FSA almost always beats the credit because the FSA also saves payroll taxes (which the non-refundable credit does not). Your tax advisor can run the numbers for your specific situation.
