The number that changed dependent care

Investor Services Insights · Updated for 2026

The dependent care flexible spending account was, for most of its life, a benefit too small to matter much. Its $5,000 cap was set in 1986 and never indexed to inflation. Legislation enacted in July 2025 raised it to $7,500 for plan years beginning in 2026 — $3,750 for a married person filing separately.

Nominally that is a 50% increase. Measured against the price of child care, it is a partial repair of forty years of erosion.

What the account does

A dependent care FSA reimburses the cost of care that enables you — and your spouse, if married — to work or look for work. The qualifying dependent is a child under 13, or a spouse or dependent of any age who is incapable of self-care and lives with you more than half the year.

Eligible costs include day care, preschool, before- and after-school programs, day camp, a nanny or au pair, and adult day care. The exclusions matter: overnight camp never qualifies, kindergarten and above are treated as education rather than care, and a babysitter engaged so you can go to dinner is not covered, because it does not enable you to work.

Two mechanics people get wrong

First, reimbursement is limited to what you have actually contributed. Unlike a health FSA — where the full annual election is available on day one — a dependent care FSA pays out only as payroll deductions accumulate. A January invoice cannot draw against a December contribution.

Second, there is no carryover. The $680 rollover applies to health FSAs. Dependent care balances are forfeited at plan-year end, subject only to a grace period if the plan offers one.

The credit, and the choice between them

The Child and Dependent Care Credit covers the same expenses, and you may not use both on the same dollar. Which is better depends on your marginal rate. The FSA excludes income from federal income tax and from Social Security and Medicare tax, which is why it typically wins for higher earners — the payroll-tax saving alone is meaningful. Lower-income households often do better with the credit, which is worth a larger percentage of expenses at the bottom of the income scale.

With the cap at $7,500, more households now find the FSA the better instrument, and a coordinated approach — running expenses through the FSA up to the limit, and claiming the credit against any remainder within the credit’s own ceiling — is worth modeling rather than guessing.

What to do at enrollment

Estimate care costs for the coming year with the invoices you already have, not from memory. Elect the amount you are confident you will spend, remembering that the money arrives only as you earn it, and that what you do not spend, you lose. Then check whether your marginal rate favors the credit. For the first time in a long time, the answer is worth the arithmetic.

This article is general information, not individualized investment, legal, or tax advice. Sources referenced include the Internal Revenue Service, Department of Labor, Securities and Exchange Commission, and FINRA. Consult a qualified professional about your circumstances.

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