Parents with crushing child care expenses will get a little more help in 2026, from Trump’s new mega tax and spending law.
The new tax law permanently increases the annual pre-tax contribution limit for dependent care flexible spending accounts, or DCFSAs, to $7,500 for married, joint filers. That’s up from $5,000 and is the first change since 1986, apart from a temporary pandemic-era boost in 2021.
It also expanded another tax provision, the child dependent care tax credit (CDCT), making up to 50% of a maximum of $3,000 of qualifying expenses reimbursable for one child and a $6,000 maximum for two or more. That means the maximum tax credit for one child increases to $1,500 from $1,050.
Both changes can be good news for parents, but they should do the math to see which is more lucrative, accountants said.
If your employer offers a DCFSA, the “pre-tax dependent care FSA usually beats the dependent care credit” because of the higher contribution limit starting next year, said Richard Pon, a certified public accountant in San Francisco.
Why a dependent care FSA may beat a credit
Usually, a tax credit is more valuable than a tax deduction, which is what a pre-tax contribution to a dependent care FSA would be.
A tax credit is a dollar-for-dollar reduction of your tax bill, and a deduction lowers your taxable income. For example, a $1,000 tax credit cuts your tax bill by $1,000. A $1,000 tax deduction for someone in the 22% tax bracket would result in $220 in tax savings ($1,000 x 0.22 = $220).
But the maximum dependent care credit, in this case, phases out quickly and only applies to federal taxes.
More: Trump’s sweeping law increases child care tax credits. Here’s how much and who benefits.
“In contrast, your payroll tax deduction reduces federal income tax, Social Security tax, Medicare tax and state tax,” Pon said. “And there is no payroll phase-out…Your savings depends on your tax rate but with federal, state and 7.65% FICA (or Federal Insurance Contributions Act to fund Social Security and Medicare) taxes, your tax savings really adds up.”
Additionally, a payroll deduction can reduce taxes paid in each pay period, which gives you more money throughout the year, said Sara Taylor, senior director of employee spending accounts at consulting firm WTW.
“On the tax credit side, it’s a credit so there’s no reduction in taxes you pay,” she said. “It’s just lowering what you owe when pay taxes. The benefit is delayed, and it does not increase your refund at all.”
CDCT is a non-refundable tax credit, meaning it can reduce tax liability down to zero, but no refund is given if the credit exceeds tax liability.
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How do tax savings compare with DCFSA vs dependent care credit?
Here’s how the two tax changes compare for a family with two working parents, two children, $7,000 in qualified dependent care expenses during 2026, with adjusted gross income (AGI, or gross income minus certain deductions) of $60,000 and a marginal federal income tax rate of 22%:
DCFSA
DCFSA contribution: $7,500
Tax savings (federal income tax): $7,500 x 22% tax rate = $1,650
Tax savings (FICA taxes): $7,500 x 7.65% = $573.75.
Total tax savings: $1,650 + $573.75 = $2,223.75
CDCTC
Qualifying expenses for CDCTC: $6,000
CDCTC credit rate: With an AGI of $60,000, the family’s credit rate is calculated on a sliding scale. Tax credit would be 35% at this AGI, or $6,000 x 35%= $2,100.
Tax savings: CDCTC is non-refundable so total tax savings would remain $2,100.
Can Americans use both provisions?
Americans can use both the CDCTC and DCFSA, but it could be tough due to restrictions on each. The ability to leverage these options depends heavily on individual circumstances, such as income level, filing status, state and local tax implications, and the amount of qualified dependent care expenses.
Beware, there are specific items that are considered qualified expenses, and the same expenses can’t be used for both options.
Potential pitfalls of DCFSA
Tax savings are attractive with the DCFSA, but experts also issued a few warnings.
Employers aren’t required to offer a DCFSA or even the higher $7,500 benefit. They can choose to keep the contribution limit at $5,000 because employer “plans must not discriminate in favor of highly compensated employees,” Pon said. “Having a higher limit may cause employers to fail this test.”
What employers can do is raise the limit for less highly compensated employees and scale it back for those who earn more, Taylor said.
All of this may take time, so many employers may not have this implemented for 2026, she said. To offer this benefit, employers must amend their plans by December 31, 2025.
But “this is so good for employees that I think most employers will adopt the higher benefit,” Taylor said.
Use it or lose it applies. Whatever money in the FSA isn’t used by year end, you lose it. DCFSA “enrollment has been very low, 2% to 5% of the employee population, which is incredibly low,” Taylor said. Part of that is because not all employers offer DCFSAs, not 100% of the employee population is eligible all the time and “because people are afraid of ‘use it or lose it’ and don’t understand it,” she said.
“But if your employer offers this benefit, I really encourage people look at that,” she said. “This is an incredibly overlooked benefit.” If not, the DCTC is available to everyone, she said.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: Trump tax law boosts 2 ways to ease child care costs. How to pick?
