By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.
For 2026, a dependent care FSA lets a household set aside up to $7,500 of pay before tax for child care ($3,750 if married filing separately), up from $5,000, under the One Big Beautiful Bill Act, section 70404. It is one limit per household, not per parent, and it covers care for children under 13 so that both parents can work. For a two-earner family earning $750,000 or more, it typically cuts about $2,800 to $3,600 off the year’s tax bill, and it is usually the only federal child care tax break still worth much at that income.
This page covers what the account saves at your income in California and Washington, what it pays for, the rules that catch two-earner families, and how it compares with the child care credit. It is written for busy parents choosing benefits in open enrollment who want a clear answer rather than a research project.
The 2026 dependent care FSA limit: $7,500 per household
A dependent care FSA (the tax code calls it a dependent care assistance program, under IRC section 129) is an employer benefit run through a cafeteria plan. You elect an annual amount, your employer takes it out of each paycheck before tax, and you get reimbursed as you pay for care. The money you run through it is excluded from federal income tax, Social Security and Medicare tax, according to IRS Publication 15-B (2026).
- Limit for 2026: $7,500 per household, or $3,750 for each spouse filing separately. The law made the increase permanent and did not index it for inflation (P.L. 119-21, section 70404).
- One cap for the couple. If both of you have access to the benefit at work, you can split the election however you like, but the total excluded on your joint return cannot exceed $7,500.
- Your employer’s plan has to adopt the higher number. The law allows $7,500; a plan can still offer less. Check the enrollment screen, not a headline.
- The exclusion is capped at the lower earner’s earned income (IRS Publication 503). For most families reading this, both incomes clear $7,500 easily, so this only matters if one parent is on unpaid leave or between jobs for much of the year.
What a $7,500 dependent care FSA saves a family earning $750k in California vs Washington
The saving is the $7,500 times every tax that would otherwise hit that pay. At this income, that means your top federal bracket, Medicare tax, and in California, state income tax and state disability insurance. Social Security tax usually drops out, because each spouse’s pay is already above the 2026 wage base of $184,500 (IRS Publication 15 (2026)).
California adds one wrinkle. California follows the federal tax code only as it stood on January 1, 2025 (Revenue and Taxation Code section 17024.5), and the FTB states that “in general, California R&TC does not conform to the OBBBA” (2025 Form 540 booklet). So for California income tax, plan on only the first $5,000 being excluded. The other $2,500 is still excluded federally but is likely taxable on your California return. The EDD lists dependent care salary reductions up to $5,000 as not subject to SDI (EDD DE 231EB), so the example below counts SDI savings on $5,000 only.
Worked example: four households electing the full $7,500 for 2026
Assumptions (labelled, so you can adjust them): married filing jointly, two W-2 earners, two children ages 3 and 6 in full-time care, both spouses paid more than $184,500. The $750,000 households are assumed to have 2026 federal taxable income of about $640,000 (35% bracket, $512,450 to $768,700) and California taxable income of about $700,000 (9.3% bracket for 2025, $145,448 to $742,958). The $1.6 million households are assumed to be in the 37% federal bracket (over $768,700 for 2026) and the 11.3% California bracket (2025, $891,542 to $1,485,906) plus the 1% Behavioral Health Services Tax on California taxable income over $1,000,000. Federal brackets are from Rev. Proc. 2025-32; California brackets are the latest published (2025) from the FTB 2025 rate schedules, since 2026 schedules are not yet out.
| Tax saved on the $7,500 election (2026) | CA, $750k W-2 | WA, $750k W-2 | CA, $1.6M W-2 | WA, $1.6M W-2 |
|---|---|---|---|---|
| Federal income tax (35% or 37% of $7,500) | $2,625 | $2,625 | $2,775 | $2,775 |
| Medicare, 1.45% plus 0.9% Additional Medicare Tax (2.35% of $7,500) | $176 | $176 | $176 | $176 |
| Social Security (both spouses above $184,500) | $0 | $0 | $0 | $0 |
| California income tax on the first $5,000 (9.3%, or 12.3% including the 1% tax) | $465 | n/a | $615 | n/a |
| California SDI, 1.3% of $5,000 | $65 | n/a | $65 | n/a |
| Total saved for the year | $3,331 | $2,801 | $3,631 | $2,951 |
Medicare math: the 0.9% Additional Medicare Tax applies to joint wages above $250,000 (IRS Additional Medicare Tax Q&A), so every dollar of the election avoids 2.35% in total. California SDI is 1.3% of all wages for 2026 with no cap (EDD rates). Washington has no wage income tax in 2026 (WA Department of Revenue); note that Washington has enacted a 9.9% tax on AGI above $1,000,000 starting January 1, 2028, so the Washington numbers may change for the highest earners from 2028.
Which spouse should elect it. If one parent earns less than the 2026 Social Security wage base of $184,500 and has the benefit at work, running the election through that parent’s paycheck also avoids 6.2% Social Security tax, about $465 more on $7,500. The trade-off is slightly lower Social Security earnings on that parent’s record. For most families it is a small but real reason to check which employer’s plan to use.
A few thousand dollars is not life-changing at this income. It is still one of the few breaks left for this family that costs nothing but an election and some receipts, and it repeats every year until your youngest turns 13.
Why high earners get no child tax credit, so the FSA is the child care break left
For 2026 the child tax credit is $2,200 per qualifying child (Rev. Proc. 2025-32). It phases out once modified AGI passes $400,000 on a joint return: the credit drops by $50 for each $1,000 (or part of $1,000) above that (IRS child tax credit page; Schedule 8812). A married couple with two children ($4,400 of credit) is fully phased out at $488,000. A household at $750,000 gets nothing, and neither does anyone else reading this page.
That leaves two federal breaks tied to child care: the dependent care FSA and the child and dependent care credit. At your income, the FSA is the one that pays.
Dependent care FSA vs the child and dependent care credit: you cannot use the same dollars twice
The child and dependent care credit (Form 2441) is a percentage of up to $3,000 of care costs for one child or $6,000 for two or more (IRS Publication 503). From 2026 the law sets the rate at 50% for low incomes, stepping down to a floor of 20% (P.L. 119-21, section 70405). On a joint return the rate reaches the 20% floor once AGI passes $206,000 (the 35% rate less 1 point for each $4,000, or part of $4,000, over $150,000). Every family earning $750,000 is at 20%.
- Credit without an FSA, two children: 20% of $6,000 = $1,200.
- FSA of $7,500: $2,801 to $3,631 in the example above.
You cannot stack them on the same costs. Expenses reimbursed by your FSA do not count for the credit, and the excluded FSA amount also reduces the $3,000 or $6,000 limit dollar for dollar (Pub. 503, Dependent Care Benefits). With the full $7,500 excluded, the $6,000 limit falls to zero, so there is no credit left. That is fine: the FSA is worth more than twice the credit at this income. California’s own dependent care credit requires federal AGI of $100,000 or less, so it does not apply here either (2025 Form 540 booklet, line 40).
Dependent care FSA eligible expenses: daycare, preschool, nannies, camps
The test is simple to state: the cost must be for the care of a child under 13 (or a dependent who cannot care for themselves), and you must pay it so that you and your spouse can work. Education, food and entertainment are not care, unless they are a small part that cannot be separated from the care. The rules below come from IRS Publication 503.
| Expense | Eligible? | Note |
|---|---|---|
| Licensed daycare center | Yes | Centers caring for more than six children must meet state and local rules. |
| Preschool or pre-K (below kindergarten) | Yes | Treated as care, including incidental lunch and activities. |
| Kindergarten or private school tuition, K and up | No | This is education, not care. |
| Before-school and after-school care | Yes | Even for a child in kindergarten or a higher grade. |
| Summer day camp, including sports or coding camps | Yes | Must be a day camp while you work. |
| Overnight or sleepaway camp | No | Not a work-related expense. |
| Summer school or tutoring | No | Not care. |
| Nanny or au pair wages for childcare | Yes | The portion for care; you must identify the provider. |
| Babysitter so you can go out to dinner | No | Care must be so you can work or look for work. |
| Grandparent paid for care, not your dependent | Yes | Payments to a relative you do not claim as a dependent can count. |
| Your spouse, your own child under 19, or the child’s other parent | No | Payments to these people never count. |
| Care for a child who has turned 13 | No | Only costs before the 13th birthday count. |
Rules that trip up two-earner families: household cap, both working, the age-13 cutoff
The cap is per household, not per job
If both of you enroll at your own employers and each elects $7,500, you have put $15,000 in, but only $7,500 is excluded on your joint return. Your employers do not talk to each other. The excess shows up as taxable income when you file Form 2441 (IRS Form 2441). Decide on one election for the household before either of you enrolls.
Both parents must be working, looking for work, in school full time, or unable to care for themselves
If one parent stops working for most of the year, the exclusion is capped by that parent’s earned income, which may be close to zero. Pub. 503 has special rules that treat a full-time student or disabled spouse as having some earned income. A parent on a year-long sabbatical is the case to think through before enrolling.
The age-13 cutoff
Care from a child’s 13th birthday on does not qualify. If your youngest turns 13 in June, only costs incurred before that birthday count. Size the election down in that year.
Use it or lose it, and the grace period
Money you elect but do not spend by the end of the plan year is generally forfeited. Some plans add a grace period after year end to incur more expenses, and plans set their own deadlines to submit claims. The carryover option you may know from health FSAs is a health FSA rule (IRS Notice 2013-71), so do not assume it applies here. Read your plan summary for the grace period and claim deadline.
Mid-year changes
Your election is normally locked for the plan year. Cafeteria plan rules let a plan allow changes after certain events, such as a birth, a change in care provider, or a change in what the provider charges (Treas. Reg. section 1.125-4). Whether your plan allows each change is up to the plan.
Highly compensated employees may be capped lower
Dependent care plans must pass a test showing they do not favor highly compensated employees. For 2026, that generally means anyone paid more than $160,000 in 2025 (Pub. 15-B (2026)). If a plan fails, the employer may cut elections for its highest earners, sometimes late in the year. Families at this income should read any mid-year notice from the plan administrator carefully.
Paying a nanny through a dependent care FSA: payroll and receipts
Nanny wages for childcare are an eligible expense, and a full-time nanny in the Bay Area or Seattle easily costs more than $7,500 a year, so a household with a nanny will usually use the whole election. Three things to get right:
- Payroll. A nanny who works in your home is usually your household employee, which makes you responsible for withholding and paying employment taxes and filing Schedule H with your Form 1040 (IRS Publication 926). Many families use a household payroll service for this.
- Provider identification. You must report the provider’s name, address and taxpayer ID on Form 2441 (Pub. 503, Provider Identification Test). Form W-10 is the standard way to collect it.
- Receipts. Your FSA administrator will ask for proof of payment and dates of care. Pay stubs from your payroll service usually work. Submit claims monthly or quarterly so money is not stuck in the account at year end.
If the nanny also does housework, only the share for care counts, unless the housework is small and tied to caring for the children.
Open-enrollment checklist for a dependent care FSA
- Confirm your employer’s 2026 plan limit is $7,500 (some may still show $5,000).
- Agree on one household election and decide which spouse’s plan runs it. If one of you earns under $184,500, running it through that plan can also save Social Security tax.
- Estimate eligible care for the plan year. Leave out kindergarten tuition, overnight camp and anything after a 13th birthday.
- Elect no more than you will spend by the plan deadline, including any grace period.
- If you have a nanny, confirm household payroll is set up and you have a completed Form W-10.
- In California, be prepared for up to $2,500 of the benefit to be taxable on your California return.
- Set a reminder to submit claims each quarter.
What to write down for your kids about child care decisions
Child care is often the first large, recurring spending decision a young family makes together: nanny or daycare, one income or two, which parent adjusts their schedule. Your kids will live with the result of that decision without ever seeing the reasoning behind it. A short entry in your FamilyKnowledge® Library, the record of decisions we keep with each family at the Age Five Family Office™, can capture what you chose, what it cost, and why it was worth it to your family. Conversations fade. Documentation compounds.
Dependent care FSA questions parents ask
Can we use a dependent care FSA and the child care credit in the same year?
Only on different dollars. The FSA amount you exclude reduces the credit’s $3,000 or $6,000 expense limit. With two children and a full $7,500 FSA, the $6,000 limit falls to zero, so no credit remains. With two children and a smaller election, say $4,000, up to $2,000 of other costs could still earn the 20% credit, about $400.
Is the dependent care FSA the same as a health FSA?
No. They are separate accounts with separate limits. The 2026 health FSA limit is $3,400 per employee (Rev. Proc. 2025-32) and pays medical costs; the dependent care FSA is $7,500 per household and pays for care so you can work. Money cannot move between them, and the carryover some health FSAs allow does not carry over to dependent care accounts.
Does a dependent care FSA help in Washington, with no state income tax?
Yes, just less than in California. The federal income tax and Medicare savings are the same in both states, about $2,800 for a $750,000 household in the 35% bracket for 2026. California adds roughly $530 more from state income tax and SDI on the first $5,000.
Next step
Before open enrollment closes, pull up both employers’ benefit pages side by side, pick one plan for the full $7,500, and set up quarterly claims. If you would like the dependent care decision checked alongside your RSU withholding, 401(k) elections and the rest of your employee benefits and tax picture, the Tax & Wealth Assessment is where we start. Families at Apple and Gilead often have more benefit choices to coordinate than they realize.
This is general education, and the right move depends on the family’s full picture.