Raising young children while managing a career is no small feat—and every dollar saved matters. A dependent care FSA can help you reduce your tax burden while covering essential childcare costs. With thoughtful planning, you can feel more confident about your family’s financial future. Discover how to make the most of this valuable benefit.
Learning Points
Dependent Care FSA: A Tax-Efficient Way to Pay for Childcare
IF YOU PLAN TO SEND YOUR CHILD TO NURSEY SCHOOL, DAYCARE, PRE-K, OR SUMMER CAMPS WHILE YOU AND YOUR SPOUSE WORK, you know first-hand how childcare costs represent a significant, and growing, annual expense for many American families.
If you and your spouse are looking for tax-efficient approaches to paying for childcare, one place to start is to explore whether a dependent care flexible spending account fits your family’s needs.
WHEN YOU CONTRIBUTE TO YOUR dependent care FSA, you do not incur payroll taxes on the contributed portion of your income.
This pre-tax benefit account can help reduce your taxes depending on your specific situation.
Like so many topics in financial planning, coordinating with a qualified tax advisor can be an important step when planning your dependent care FSA.
CONSIDER THESE SITUATIONS, where a dependent care flexible spending account is a useful option for your family:
- Daycare, nursery school, or preschool
- Before- and after-school care
- Babysitting / nanny expenses
If you pay these expenses for a dependent under age 13, so that you and your spouse/partner can work, explore how you can be reimbursed under your DCFSA plan.
Experiences and services like tutoring, overnight camps, or non-work-related babysitting are not eligible for reimbursement under current dependent care FSA rules.
However, Section 70413 of the OBBBA widened the scope of “qualifying higher education expenses” for 529 accounts to include materials, standardized testing, tutoring, and therapies for K-12 education.
You can learn more here about how a 529 account could support your family’s educational goals.
If contributing to your dependent care FSA is a savings priority for you, read on, and familiarize yourself with the essential details of these tax-advantage accounts.
Contribution Maximums (2025)
When you elect to contribute to a dependent care FSA, you fund it using pretax income that your employer sets aside in a separate account.
Because you make your contributions to your dependent care FSA before that income is taxed, your contributions can potentially lower your taxable income.
In 2025, the maximum amount your household can contribute to your dependent care FSAs is:
- $5,000 for single taxpayers and married couples filing jointly.
- $2,500 for married couples filing separately.
These limits are household maximums, not individual tax-payer limits. You and your spouse will want to coordinate your dependent care FSA contributions so that you do not exceed your household limit. If either of you receive any employer contributions or subsidies to your DCFSA, those employer amounts further reduce your household limit.
IN A SCENARIO WHERE YOUR EMPLOYER PROVIDES DEPENDENT CARE BENEFITS UNDER A QUALIFIED PLAN, you may be able to exclude these benefits from your income. Your employee benefits handbook should provide you with this determination. If not, contact your human resources or benefits resource department about whether the benefit plan qualifies.
If you exceed these limits, any excess contributions would be included in your gross income.
Contribution Maximums Increasing in 2026
H.R. 1, commonly referred to as the OBBBA or “One Big Beautiful Bill Act”, increased the dependent care FSA contribution maximums.
Specifically, Section 70404 of the OBBBA increased the dependent care FSA contribution maximums to the following[i]:
- $7,500 for single taxpayers and married couples filing jointly.
- $3,750 for married couples filing separately.
These new maximums are effective “in taxable years after December 31, 2025”. For the rest of humanity that doesn’t speak “Tax-Wonk”, that’s means 2026 and after (or until the law changes).
Take Action: You can start projecting your qualifying 2026 dependent care expenses (e.g. nursery school, summer camp, pre-kindergarten, etc.). From there, you and your spouse can feel better prepared to make 2026 benefit elections that align with your future dependent care expenses.
The Earned Income Minimum
IF YOU OR YOUR SPOUSE DO NOT PLAN TO HAVE EARNED INCOME in a given tax year because you are taking time out of the workforce, the dependent care FSA is not a benefit you should pursue.
The amount of work-related expenses you use to figure your credit can’t be more than:
- Your earned income for the year if you are single at the end of the year, or
- The smaller of your, or your spouse’s, earned income for the year if you are married at the end of the year.
Meaning, if you or your spouse plan to have $0 of earned income, you won’t be able to offset any qualified expenses and should not plan to fund a dependent care FSA.
There are special provisions available to those families whose spouse is a student or incapable of caring for themself.
Highly Compensated Employee
If you are categorized as a highly compensated employee (HCE) by your employer, then your maximum dependent care benefit could be reduced.
In the context of your dependent care FSA in 2025, you are generally considered a highly compensated employee (HCE) if you are:
- A more-than-5% owner of the employer at any time in the current or preceding plan year; or
- An employee who earned more than $155,000 in the prior plan year.
Your employer can choose to ignore the second bullet if you, the employee, weren’t also in the top 20% of employees when ranked by pay for the preceding year[ii].
You can ask your benefits team for a definitive answer on your highly compensated employee status based on your employer’s non-discrimination testing results. Sometimes, due to the timing of your employer’s benefits election window and IRS guidance on the upcoming tax year’s highly compensated employee definition, you might need to reduce, or eliminate, your dependent care FSA contribution plans.
Dependent Care FSA Hypothetical Example: 2026 Projection
Let’s put together all the terms and concepts of the dependent care FSA into a real-world example that parents like you might experience.
Looking ahead to 2026, you expect that your 4-year-old will attend your preferred early childhood center. You estimate the cost to be $350/week.
Together, you forecast that you and your spouse are eligible to contribute the 2026 dependent care FSA maximum of $7,500. Which means you project your $7,500 of dependent care FSA contributions to cover a little more than 21 weeks of “tuition”.
Let’s also assume in this illustrative example that you and your spouse estimate average payroll taxes – federal, state, FICA and city taxes – of 30%.
Given these projections, you estimate that your family’s $7,500 dependent care FSA contributions could save your family $2,250. That’s another 6 weeks of “tuition”.
Each family’s specific facts and circumstances will influence contribution maximums and tax savings, for example. BECAUSE TOPICS LIKE THE DEPENDENT CARE FSA, like so many others in financial planning, intersect with the world of tax, make sure you coordinate with a qualified tax professional.
Practical Considerations in Your Dependent Care FSA Planning
Qualifying Life Event
If you’re having a new baby, or experience another Qualifying Life Event, you should be able to enroll in your employer’s DCFSA program.
If your child is due in late 2025 or future years, be sure to accurately forecast when you’ll start paying for childcare.
For example, factor in how much parental leave time you and your spouse will enjoy. Will you stagger your parental leave? Overlap it? Depending on your choices, daycare might not start until sometime in the new year.
No Rollovers Allowed
As you think about contributing to your dependent care FSA in the upcoming benefit election window, keep in mind that no rollovers are currently allowed.
Meaning, if you over-contribute, you could potentially forfeit those excess contributions after the end of the benefit plan year.
Unlike other benefits, dependent care FSA is a “use it or lose it” benefit.
Switching Jobs or Uncertain Employment?
If you anticipate changing jobs in the upcoming year, you might pay closer attention to how much you elect to fund your dependent care FSA.
Interestingly, your employer owns your dependent care FSA account. Not you.
And so, if you anticipate leaving your current employer two months into the year, you want to avoid electing to fund your DCFSA with expenses that will not occur during those two months.
For example, projected daycare costs or summer camp expenses that you would incur later in the next year.
Alternatively, your spouse could simply increase their contribution levels to meet your dependent care expenses. After all, you’re a team.
Documentation for Reimbursement and Tax Filings
ONCE YOU HAVE PAID FOR EXPENSES THAT QUALIFY FOR DEPENDENT CARE FSA REIMBURSEMENT, you will need to complete a claim through your employer’s chosen provider and process.
Providing the correct documentation is critical.
Specifically, you’ll want to verify your dependent care provider shares the following data in their documentation:
- Provider name and address
- Name of dependent receiving care
- Amount you paid for service
- Type of service (e.g. day care, day camp, after-school, etc.)
- Date(s) of service
Importantly, you’ll need each provider’s SSN (Social Security Number) or EIN (Employer Identification Number) for your taxes (see Form 2441).
If you’re looking to learn more about the details of this topic or to explore how it applies to your family’s situation, consider reviewing the IRS’s Publication 503, Child and Dependent Care Expenses.
Tracking Your Dependent Care FSA Expenses
You can create a simple tracking spreadsheet to document your qualifying dependent care expenses. Use it to track the expenses you’ve incurred, submitted for reimbursement, or need to gather additional documentation for.
Use it to organize your dependent care documentation throughout the year for your tax files.
Take the approach of gathering, organizing and submitting dependent care FSA documentation as expenses are incurred, rather than waiting until the last minute.
As a starting point here is an example of a dependent care FSA tracker:
If you’re interested in the underlying Excel template, please feel free to reach out to us at info (at sign) havenwp.com.
A Long-Term Approach to Your Family’s Goals
Long-term investors like you can evaluate multiple savings priorities.
Understanding whether fully funding your 401(k), gifting the maximum annual exclusion amount to your child’s 529, contributing to your dependent care FSA, increasing your emergency fund, or some combination of these and other savings priorities aligns with your goals and values.
When you’re comfortable that you’re minimizing your taxes, your living expenses are dialed in and aligned with your values, it becomes easier to save the right amounts toward your future goals/savings priorities.
Taking a Strategic View of Your Finances
An essential step of a robust financial plan is to understand the downsides and tradeoffs of using your family’s resources to fund one savings priority over another.
As a parent, it’s important to evaluate whether funding your own retirement is a higher priority than your child’s future education. For some families, that means you want to analyze the right balance of retirement and education funding contributions.
We help busy parents and individual professionals like you explore tax-efficient gifting strategies and develop financial plans to address questions like:
- How can we save for a fulfilling retirement beyond our 401(k) plans?
- What does it take to save for the kids’ education and make a lifetime of memories along the way?
- These causes are close to our hearts – what are our options to give even more meaningful support?
As your financial planner in Saint Louis, we can help you get organized and start feeling more confident that you are making progress towards your savings priorities.
Working with your financial planner can provide you with the right mix of accountability, collaboration, and long-term thinking.
When you know who and what are truly important, we can help you create incredible clarity about your spending and savings priorities. Clarity to confidently save for and spend on what matters.
If you’re ready to take the next step together, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.
[i] “H.R.1 – 119th Congress (2025-2026): One Big Beautiful Bill Act.” Congress.gov, Library of Congress, 4 July 2025, https://www.congress.gov/bill/119th-congress/house-bill/1
[ii] “Publication 15-B, Employer’s Tax Guide to Fringe Benefits (2025)”, IRS.gov, Internal Revenue Service, 20 March, 2025, https://www.irs.gov/pub/irs-pdf/p15b.pdf