If you have kids starting school or switching to after-school care this month, there’s a tax rule hiding inside your benefits portal that could be worth more than a thousand dollars, and most people don’t touch it until open enrollment in November. This year the dependent care FSA limit went from $5,000 to $7,500 per household, the first increase since the 1980s outside of a one-year pandemic bump. That change came from the One Big Beautiful Bill Act and applies to tax years starting January 1, 2026. I think the bigger story is the timing. A new school year often counts as a change in your care costs, which can open a window to adjust your election now instead of waiting until January. I’m not a tax advisor, so check the details with your HR team or a tax pro, but here’s how the money works.
Child care now costs about as much as rent
Care.com’s 2026 Cost of Care report, published in February, put the average posted rate for an after-school sitter for one child at $328 a week, for about 15 hours. Daycare averaged $332 a week, and a nanny $870. The average parent in that survey said child care eats 20% of household income, and 78% of families spend 10% or more. The federal benchmark for “affordable” child care is 7%.
At $328 a week, a school year of after-school care runs well past $10,000. Add summer day camp and you’re paying for child care with after-tax dollars on a scale most families never planned for. The dependent care FSA, sometimes called a DCAP, lets you pay those bills with money that skips income tax and payroll tax.
A dependent care FSA saves more than the credit for most working couples
There are two federal tax breaks for child care, and you mostly have to pick between them. The FSA takes up to $7,500 out of your paycheck before taxes. The child and dependent care credit, which you claim on your return, covers a percentage of up to $3,000 of expenses for one child or $6,000 for two or more. Money you run through the FSA reduces the expenses you can claim for the credit dollar for dollar, so if you max out the FSA, there’s nothing left for the credit.
The same law made the credit more generous at lower incomes. Starting in 2026, it can cover as much as 50% of expenses for families with adjusted gross income under $15,000, phasing down to 35%, and then down to a floor of 20% for married couples filing jointly with AGI above about $210,000. For many two-income households in the middle and upper brackets, the FSA still wins, partly because it also skips the 7.65% in Social Security and Medicare tax that the credit can’t touch.
The worked example: $2,599 versus $1,200
Here’s a household I’ll use because it looks like a lot of my friends. Two working parents, two kids in after-school care, joint AGI of $220,000, in the 22% federal bracket and paying a 5% state income tax.
Put $7,500 through the dependent care FSA and that money skips federal income tax (22%), payroll tax (7.65%), and state tax (5%), a combined 34.65%. Multiply $7,500 by 0.3465 and you get about $2,599 in tax you don’t pay.
Now the credit. At $220,000 AGI, this couple is at the 20% floor. Twenty percent of the $6,000 expense cap is $1,200.
The FSA comes out ahead by about $1,399. If this couple had been contributing only the old $5,000 maximum, raising to $7,500 adds $2,500 of tax-free money, which at 34.65% is another $866 a year. If your income is much lower, run the numbers both ways, because the bigger credit percentages can close the gap, and the credit doesn’t require your employer to offer anything.
A back-to-school change can count as a qualifying event
This is the part I couldn’t find in the top articles about the new limit. Most FSA elections are locked for the plan year unless you have a qualifying change. The IRS rules for cafeteria plans include changes in the cost or coverage of dependent care, and many plans treat a child starting school, moving from a daycare to an after-school program, or switching to a new provider as one of those. If your plan allows it, you can usually raise your election within 30 days or so of the change.
Two warnings. First, your employer has to have adopted the $7,500 limit. The law raised the ceiling, but plans aren’t required to use it, and some needed to amend their documents first. Second, if you raise your election in August, you only have the rest of the plan year to spend it, and money left over can be forfeited. Do the math on what you’ll actually pay through December. If your after-school bill is $328 a week and there are 17 weeks left in the year, that’s $5,576 in expenses, which supports a much larger election than most people chose last November.
What counts and what doesn’t
IRS Publication 503 is the plain-language guide here. Care for a child under 13 so that you (and your spouse, if married) can work or look for work counts. Before and after-school care counts. Day camp counts, including specialty day camps. Overnight camp does not. Tuition for kindergarten and up does not, because the IRS treats it as education. Payments to your own child under 19, or to someone you claim as a dependent, don’t qualify either.
Keep receipts and the provider’s tax ID, because you’ll need them to get reimbursed and again on Form 2441 at tax time.
Treat your benefits like part of your pay
I’ve written before about how unused PTO is a pay cut, and this is the same idea. Benefits you don’t use are compensation you leave on the table, and the gap compounds for women, who start falling behind on pay early and are more likely to be the parent juggling pickup. Log into your benefits portal this week, look up your plan’s dependent care FSA limit and its change-in-status rules, and send HR one email asking whether a new school-year care arrangement counts. For a household like the one in my example, that one email could be worth more than a thousand dollars this year.