Dependent Care Benefits: Explained
By Brigid Schulte and Rebecca Gale
The United States spends less on child care than almost any other developed nation, leaving parents to foot most of the cost, which can put a significant strain on any family budget. But there are a few tax provisions out there that can help offset the rising costs of raising young children. Families just need to know about them. And when and how to apply.
And for many, a company’s Open Enrollment season every fall, which is currently underway, whereby employees can make decisions about their benefits for the calendar year 2026, gives families some of the best options. It can be confusing, financial advisors say. But one that they recommend families take a close look at is the Dependent Care Flexible Savings Account, especially since Congress voted last July to increase the benefit for the first time since 1986.
Now, parents can set aside as much as $7,500 in pre-tax dollars, which lowers a family’s total tax liability, to cover eligible child care expenses, including paying for nannies, pre-school, child care, after-school care, or summer camps. (Married couples filing separately can now set aside $3,750 each.) That’s up from the $5,000 per household limit set in 1986.
“This is a tremendous opportunity for families,” said Chris Woods, a financial planner in Charlotte, North Carolina, who assists many African American families in building wealth and financial stability. “The higher dollar amount still isn’t enough. With the high cost of child care in this country, $7,500 is a drop in the bucket. But for families who have this available to them, it’s a tremendous benefit that everyone can take advantage of.”
Child care costs rose, on average, by 29 percent from 2020 to 2024, according to Child Care Aware of America, which tracks child care costs in annual surveys. For those earning the median family income—about $83,000—child care can consume 10 percent of a married couple’s income and 35 percent for a single parent. In most states, infant care at child care centers costs more than rent, mortgage, or in-state college tuition.
The lack of affordable care is pushing many parents out of the workforce, which costs the economy an estimated $122 billion a year in lost earnings, productivity, and tax revenue. In 2025 alone, about 450,000 women were forced out of the workforce, and the lack of both flexible work and affordable child care played critical roles, analysts say.
As a result of this deepening child care crisis, a bipartisan group of lawmakers, led by Sens. Katie Britt, R-Alabama, and Tim Kaine, D-Virginia, pushed to expand these tax benefits as part of the major federal legislation that made sweeping changes to tax law, social programs, and government spending that was signed into law in July.
Woods brings up three important considerations for families: First, not all companies offer Dependent Care FSAs, so Woods suggests people check with their company’s benefits plans. And the share who do has been declining, from 65 percent of employers in 2021 to 54 percent in 2025, according to Society of Human Resource Management surveys. “I wish more people had access than they do,” Woods said.
Second, the Dependent Care FSA is a “use it or lose it” benefit. Unlike Health Care Savings Accounts, which can roll over into the following year, families have to make sure they’ll spend the entire amount set aside for child care by the end of the year.
And finally, the Dependent Care FSA is available to all employees, regardless of income level, unlike another tax benefit, the Child and Dependent Care Tax Credit, which families would claim when filing their taxes. The CDCTC has strict income limits.
Congress also voted in July to expand the amount of child care expenses that working parents can claim on their annual taxes, lowering their overall tax burden while helping families cover child care costs. Now, working parents can claim up to $6,000 for two children, $3,000 for one child, to use toward the costs of a registered child care or child care provider for a child under the age of 13. (Families can also use the tax credit to cover care costs for dependents who can’t care for themselves.) Families will then receive a percentage back as a tax credit, based on a sliding scale. Families with the lowest incomes will now receive a maximum 50 percent credit. Before the new law, it had been 35 percent.
All parents must be working, though. A family with a stay-at-home parent, even if they utilize some child care, is not eligible, though exceptions exist for parents who are students or parents who are disabled and cannot work.
Because this credit is nonrefundable – meaning that families cannot take advantage of it unless they pay a higher amount in taxes than they would receive in the benefit- it is limited in terms of people being able to utilize it. Almost all the families that do take advantage of this credit are middle to high income. The First Five Years Fund estimates that the new law will increase tax credits for nearly four million families, including dual-income households earning up to $206,000 and single-income households earning up to $103,000.
To Woods, the newly expanded Dependent Care FSA is the best option for most families. “I think that’s going to be the better way to go,” he said. However, for those whose employers don’t offer it, he suggests exploring the Child and Dependent Care Tax Credit.
For those who may seek to use both tax credits, Woods cautions that families have to be careful to show they aren’t double-dipping. “You cannot claim the same child care expenses with the FSA and the CDCTC,” he said.
Congress also voted to increase the non-refundable Child Tax Credit from $2,000 per child to $2,200 per child for dual-income married households earning up to $400,000 and single-parent families earning up to $200,000.
The increase, however, is far lower than the pandemic-era expansion in 2021 ($3,600 per child under six and $3,000 for children six to 17). Because it was fully refundable and paid out monthly rather than in one annual lump sum, the expansion benefitted many single parents and low-income families who typically don’t qualify for the tax credit, lifted 3 million children out of poverty, and brought child poverty to historic lows.
Some lawmakers, both Democratic and Republican, including Vice President JD Vance, have proposed legislation to expand the Child Tax Credit, and some proposals would make it fully refundable, so it would be available to more families with lower earnings.
“Child care is an ongoing concern for families,” said Woods. “There aren’t a ton of benefits available. So, whenever people can, try to take advantage of them. If they can afford to do so, try to max them out.”
Brigid Schulte is an award-winning journalist, author, and director of the Better Life Lab at New America. Rebecca Gale is a staff writer at the Better Life Lab at New America.
