By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
The biggest FSA change for 2026 is the dependent care FSA limit: it rose to $7,500 per household ($3,750 if married filing separately), up from $5,000, under the 2025 federal tax law (P.L. 119-21, §70404). The health care FSA limit for 2026 is $3,400 per employee, with up to $680 carrying into the next year if your plan allows it (Rev. Proc. 2025-32). The new dependent care limit applies only if your employer’s plan has adopted it, so check your plan before you count on it.
For a two-earner household with young children in California or Washington, these accounts are small next to RSUs or a 401(k). They are also nearly automatic money: at a 37% federal bracket, a full $7,500 dependent care election is worth roughly $2,950 a year in federal income and Medicare tax alone. Below is how the two accounts work at your income, a worked example, and what to check before 2027 open enrollment.
What changed for 2026, and what did not
| Account | 2025 | 2026 | Indexed for inflation? |
|---|---|---|---|
| Dependent care FSA (DCAP) | $5,000 per household | $7,500 per household ($3,750 MFS) | No |
| Health care FSA | Set by IRS each year | $3,400 per employee | Yes |
| Health FSA carryover (if the plan offers it) | Set by IRS each year | Up to $680 | Yes |
Two things did not change. First, the dependent care limit is per household, not per parent. Second, it is not indexed, so $7,500 stays $7,500 until Congress changes it again. Also worth knowing: the 2026 tax “sunset” that many older articles warned about did not happen. The federal rate brackets were made permanent in the same law, so an FSA dollar saves you the same 37% in 2026 that it would have in 2025 if you are in the top bracket.
How a dependent care FSA works for parents of kids under 13
You elect an annual amount at open enrollment. Your employer takes it from your paycheck before federal income tax, Social Security and Medicare tax. You then submit receipts for care that lets both parents work, and the plan reimburses you.
Care counts if the child is under age 13 when the care is provided. According to IRS Publication 503 (2025), these generally qualify:
- Daycare, preschool and nursery school (below kindergarten).
- Before-school and after-school care, even for a child in kindergarten or older.
- Summer day camp, including specialty camps like coding or soccer.
- A nanny or au pair, for the care portion of the cost, as long as you report the provider’s taxpayer ID.
These do not qualify: kindergarten or private school tuition, overnight camp, summer school and tutoring, and payments to your own child under 19 or to anyone you claim as a dependent.
One limit catches dual-career families who take a sabbatical or unpaid leave. The tax-free amount cannot exceed the earned income of the lower-earning spouse. If one parent stops working for most of the year, the benefit shrinks or disappears. Our article on filing when one parent stays home covers the rest of that picture.
Why the FSA beats the child care credit at $750k and above
Families often ask whether to use the dependent care FSA or claim the child and dependent care credit. At this income, the FSA wins almost every time.
The credit applies to up to $3,000 of care expenses for one child or $6,000 for two or more. For higher-income families the credit rate bottoms out at 20% (Publication 503, 2025 rate table). The 2025 law raised the rates for lower incomes starting in 2026 but kept the 20% floor for joint filers with AGI above roughly $206,000 (P.L. 119-21, §70405). That means the credit is worth at most $1,200 a year. Every dollar you run through a dependent care FSA also reduces that $3,000 or $6,000 cap dollar for dollar. A $7,500 FSA election wipes out the $6,000 cap entirely, so you get no credit, but the FSA is worth far more than $1,200 to you.
Worked example: a $1 million California household
Assumptions: a married couple in San Mateo County filing jointly, $1,000,000 of combined W-2 pay, two children ages 3 and 7. Preschool costs $30,000 a year and after-school care plus summer day camp costs another $9,000. After 401(k) deferrals and deductions, federal taxable income is about $930,000 and California taxable income is about $950,000. One spouse’s employer has adopted the $7,500 limit.
| Tax saved on a $7,500 dependent care election | Rate | Saving |
|---|---|---|
| Federal income tax (37% bracket starts at $768,700 MFJ taxable income, 2026) | 37% | $2,775 |
| Medicare tax (1.45%) plus Additional Medicare Tax (0.9% on joint wages over $250,000) | 2.35% | $176 |
| California income tax on the first $5,000 (11.3% bracket, 2025 schedule) | 11.3% | $565 |
| Total | about $3,516 |
Social Security tax is not in the table because, in this example, both spouses earn well above the 2026 wage base of $184,500, so the FSA does not reduce it. If both spouses also elect a $3,400 health FSA for predictable costs such as orthodontics, glasses or therapy co-pays, that is another $6,800 of pay taxed at roughly 50.65% combined (37% + 2.35% + 11.3%), or about $3,444 saved.
Compare that with the credit: at most $1,200, and only if they skip the FSA. Under current law, the FSA route is worth about $2,300 more a year in this example, for as long as the family has at least $7,500 of qualifying care costs for a child under 13.
California and the extra $2,500
California generally does not conform to the 2025 federal tax law (FTB 2025 Form 540 booklet). Until the Franchise Tax Board says otherwise, treat the part of your election above $5,000 as possibly taxable on your California return. That is why the example counts California savings on $5,000 only. If California conforms, the saving rises by about $283. Ask your preparer to watch for this when 2026 returns are filed.
Washington families
Washington has no wage income tax in 2026 (WA DOR), so the same $7,500 election saves federal income tax and Medicare tax, about $2,951 in the example above. Note for planning: Washington has enacted a 9.9% income tax on AGI over $1,000,000 starting January 1, 2028, so a household near that line may see these elections matter at the state level too in a few years, depending on how the tax defines income (DOR guidance is still pending).
The health FSA and the HSA: pick one structure
A general-purpose health FSA makes you ineligible to contribute to an HSA for those months (IRS Publication 969). If you are on a high-deductible plan and funding a family HSA ($8,750 for 2026), use a limited-purpose FSA that covers only dental and vision, if your employer offers one. In California, keep in mind that the state does not conform to the federal HSA rules: contributions are not deductible and earnings are taxed each year on your California return (FTB 2025 Schedule CA instructions), so the HSA’s advantage is mostly federal. Our guide to high-deductible plans for families walks through that trade.
Four checks before 2027 open enrollment
- Confirm your plan’s dependent care limit. The $7,500 figure is the federal ceiling. Your plan document or benefits portal shows whether your employer adopted it. If one spouse’s plan offers $7,500 and the other’s only $5,000, elect through the higher one.
- Elect once per household. If each parent elects $7,500 through a different employer, the $7,500 above the household limit becomes taxable wages on your return. Decide which spouse elects and write it down.
- Size the health FSA to known costs. Health FSAs are mostly use-it-or-lose-it. A plan may offer either a carryover (up to $680 for 2026 balances) or a grace period of up to 2.5 months, but not both (IRS Notice 2013-71). The carryover option in that notice covers health FSAs only, so do not plan on rolling unused dependent care money into the next year. Elect only what you are sure to spend.
- Spend down and claim your 2026 balances. Before December 31, check what is left in each account and when your plan’s claims deadline falls. Submit the year’s preschool and camp receipts now, not in March.
If your childcare changes mid-year, for example a new baby or a switch in daycare provider or cost, the regulations generally allow you to change your dependent care election outside open enrollment (Treas. Reg. §1.125-4). Your plan sets the exact window.
Common mistakes we see
- Assuming the new limit applies without checking the plan.
- Both spouses electing the household maximum.
- Submitting kindergarten tuition or overnight camp receipts, which the plan should deny.
- Paying a nanny without payroll. To claim the care, you report the provider’s taxpayer ID on Form 2441, and a household employee usually brings employer payroll obligations.
- Pairing a general-purpose health FSA with an HSA.
What to write down for your kids
Childcare is one of the largest line items for families at this stage. Your children will not remember the FSA. They may remember that someone always picked them up, or that one parent cut back hours for two years. A short note on why you chose the care you did, what it cost, and how you weighed work against time at home is the kind of reasoning that otherwise disappears. As Kevin Luu puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” The FamilyKnowledge® Library is where families we work with keep notes like this.
Frequently asked questions
Is the 2026 dependent care FSA limit per person or per household?
Per household. Married couples filing jointly can exclude a total of $7,500 for 2026, no matter how many children they have or how many employers offer a plan. Married couples filing separately are limited to $3,750 each. Any amount elected above the household limit becomes taxable income on your return.
Will the $7,500 dependent care limit rise with inflation?
No. The 2025 law set it at $7,500 without an inflation adjustment, so it stays there until Congress changes it. The health FSA limit is different: the IRS adjusts it each year, typically announcing the next year’s figure in the fall, in time for open enrollment.
Can we use the dependent care FSA and the child care credit together?
Only on different dollars. FSA reimbursements reduce the $3,000 or $6,000 expense cap for the credit. With a $7,500 election and two or more children, nothing is left for the credit. At high incomes the FSA is worth much more, so that is usually the right trade.
Next step
Pull up both spouses’ benefits portals this week, confirm the 2027 dependent care limit, and decide which of you elects it. If you would like a second set of eyes on how these elections fit with RSUs, your 401(k) and the 529, our Tax & Wealth Assessment is where Age Five Family Office™ starts with new families. More on workplace benefits is on our employee benefits page.
This is general education, and the right move depends on the family’s full picture.
Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.
Connect on LinkedIn → · About KevinThis is part of how we approach Tax Management for high-income W-2 families at Bright Advisers.
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