Back-to-school season is a useful reminder that the tax year is not over. With five months remaining in 2026, families with children still have time to maximize tax benefits that require planning before December 31 — several of which changed significantly this year under the One Big Beautiful Bill Act passed in July 2025.
The changes are meaningful. The Dependent Care FSA limit increased for the first time since 1986. The Child and Dependent Care Credit rate rose substantially. And the interaction between the two can significantly affect how much a family actually saves. August is a practical moment to review whether current benefit elections are optimized for the new rules.
The Child Tax Credit
The Child Tax Credit was increased to $2,200 per qualifying child beginning with the 2025 tax year under the One Big Beautiful Bill Act — up from $2,000 previously — and is now permanent and indexed for inflation annually starting in 2026, meaning the amount may be modestly higher when 2026 returns are filed.¹ The credit begins to phase out at $400,000 of modified adjusted gross income for married couples filing jointly — a threshold that remained unchanged. For most families with qualifying children under 17, this credit reduces the tax bill dollar-for-dollar and requires no additional action beyond accurate filing.
The Child and Dependent Care Credit: A Significant Upgrade
For families paying for childcare, after-school programs, or summer day camps for children under 13, the Child and Dependent Care Credit received its most substantial enhancement in decades. Beginning with the 2026 tax year, the maximum credit rate rose from 35% to 50% under the One Big Beautiful Bill Act — increasing the maximum credit to $1,500 for one qualifying dependent and $3,000 for two or more.²
The expense caps that the credit is applied to remain unchanged at $3,000 for one dependent and $6,000 for two or more. What changed is how much of those expenses can be recovered. At the 50% rate, a family spending $6,000 on qualifying childcare for two children can now claim a credit of up to $3,000 — up from a maximum of $2,100 under prior law.³ The credit phases down based on adjusted gross income, with the 50% rate available to families earning up to $15,000 and a floor of 20% applying above $103,000 for single filers and $206,000 for joint filers.
One commonly overlooked qualifying expense: summer day camp. If a day camp covers care during working hours for a child under 13, it counts toward the eligible expense limit, making it a frequently missed opportunity for families who paid for summer programs earlier this year.⁴
The Dependent Care FSA: Limit Increased for the First Time Since 1986
A Dependent Care Flexible Spending Account allows employees to set aside pre-tax dollars for qualifying childcare expenses, reducing both income tax and FICA taxes on the contributed amount. For 2026, the annual contribution limit increased from $5,000 to $7,500 under the One Big Beautiful Bill Act, with the married filing separately limit rising from $2,500 to $3,750. This is the first permanent adjustment to the FSA limit since 1986 — a 40-year wait.⁵
The increase is significant, but it comes with a coordination rule that families should understand before adjusting their elections. The Child and Dependent Care Credit applies only to unreimbursed expenses. If a Dependent Care FSA reimburses the full $7,500 limit, and qualifying expenses total less than $7,500, there may be nothing left to claim under the credit. For families with higher childcare costs and expenses that exceed the FSA limit, both benefits can be used in combination, with the FSA covering the first $7,500 and the credit applied to remaining unreimbursed expenses up to the applicable cap.⁶
For many families, the Dependent Care FSA will still produce a larger tax benefit than the credit alone, particularly at higher income levels where the credit rate is reduced. Running the math before open enrollment, typically this fall, is worth the effort.
Education Credits: What’s Changing in 2026
For families with children in college, two education credits remain available: the American Opportunity Tax Credit, worth up to $2,500 per eligible student for the first four years of postsecondary education, and the Lifetime Learning Credit, worth up to $2,000 per return for tuition and fees at eligible institutions. Beginning with the 2026 tax year, a Social Security number is required to claim either credit, which is a new requirement under the One Big Beautiful Bill Act that affects eligibility for families in certain circumstances.⁷
Bottom Line: The 2026 tax year brought meaningful improvements to the benefits available to families with children, but several require action before December 31, and the interaction between the Dependent Care FSA and the Child and Dependent Care Credit requires careful coordination. Reviewing current benefit elections and childcare expenses now, before fall open enrollment, ensures that families capture the full value of what is available. Your Wedbush advisor can help you think through the coordination and connect you with appropriate tax guidance.
Sources:
- https://finance.yahoo.com/economy/policy/articles/kiplinger-2026-tax-letter-dependent-163414796.html
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