Daycare Costs $20K a Year. Here's How to Get Some of It Back

In much of New Jersey, full-time daycare for one child runs $15,000–25,000 a year — a mortgage-sized line item that arrives right when household income is stretched. The tax code offers two tools to claw some of it back, both recently improved, and the right choice between them is decided during open enrollment, months before tax season.

Tool 1: The Dependent Care FSA — newly enlarged

The dependent care FSA lets you set aside pre-tax payroll dollars for qualifying care — daycare, preschool, before/after-school programs, summer day camp, a nanny — for children under 13 while both parents work.

The 2025 tax law raised the cap from the long-frozen $5,000 to $7,500 starting in 2026. For a household in a combined ~40% marginal zone (federal + FICA + NJ), a maxed election is worth roughly $3,000 of real savings — up meaningfully from the old cap.

The catches: it’s use-it-or-lose-it within the plan year, the election is locked at open enrollment (absent a qualifying life event), and both spouses generally need earned income. One more that surprises school employees’ households: the FSA must be offered by an employer — check whether either employer’s plan has adopted the new higher limit, since plans must opt in.

Tool 2: The Child and Dependent Care Credit — newly enhanced

If you have no FSA access (or expenses beyond it), the credit applies a percentage to up to $3,000 of expenses for one child / $6,000 for two or more. The 2025 law made the credit more generous starting in 2026, raising the top rate to 50% for lower incomes with a sliding scale down as income rises — most middle and upper-middle households land at a 20–35% rate depending on AGI.

FSA or credit? The coordination rule

You can’t double-count a dollar. FSA dollars reduce the expense pool eligible for the credit. Practical outcomes:

Higher-income households (most of our clients): the FSA wins, usually decisively — pre-tax treatment at a high marginal rate beats a 20% credit. Max the $7,500 first.

Two or more kids with big expenses: after a maxed FSA, a sliver of credit can remain on the excess (the $6,000 credit pool less FSA dollars used). Small, but it’s free — software gets this interaction wrong when the inputs are sloppy.

Lower-income households or no FSA access: the enhanced credit is the tool, and at the new 50% tier it’s dramatically better than it was.

The details that leak money

Summer day camp counts. Sleepaway camp doesn’t. Parents miss this one constantly.

The provider’s tax ID is required on Form 2441 — including for individual caregivers. Paying a nanny off the books forfeits both benefits and creates its own problem (household employment tax is a separate conversation worth having before hiring).

NJ has its own child and dependent care credit, piggybacked on the federal one for qualifying incomes — free money for eligible filers, frequently unclaimed.

Kindergarten tuition doesn’t qualify; before/after-care wrapped around it does. Get the invoice itemized.

The deadline is now, not April

The FSA decision happens at open enrollment this fall. Run the numbers before you elect: expected 2027 care costs, both employers’ plan limits, and your marginal rate. Fifteen minutes of math in November is worth $3,000 next year.

Romanchuk CPA LLC helps young families coordinate childcare benefits, credits, and NJ-specific savings like NJBEST as part of annual planning. Book at rfg.tax before your open enrollment closes.

This article is general information, not tax advice for your specific situation. Confirm current-year limits and your plan’s adopted maximums.