Maximizing Child Care Tax Deductions 2026: The High-Earner Guide
Let's be real: paying for childcare in Richmond often feels like paying a second mortgage. Whether it's a premier daycare in Short Pump or a nanny in The Fan, the costs are brutal. And for high earners, the tax code has historically offered little relief.
For years, if you made over $150,000, the IRS essentially shrugged at your daycare bills. The Child and Dependent Care Credit phased out to pennies, and the Dependent Care FSA was stuck at a stagnant $5,000 limit that barely covered three months of tuition.
That changes in 2026.
The One Big Beautiful Bill Act (OBBBA) shifted the landscape. We have a new hierarchy of childcare tax strategies, and if you are a business owner or a high-income W-2 employee, you need to update your elections now.
Here is how to maximize your childcare tax deductions in the 2026 tax year.
The new hierarchy of child care savings
Most people default to the basic tax credit on their 1040. That is a mistake. To truly optimize, we need to look at the strategies in this specific order:
- The "Whale": Employer-Provided Child Care Credit (IRC §45F) — for business owners
- The "Shield": Enhanced Dependent Care FSA — for W-2 employees
- The "Scrap": Child and Dependent Care Credit (CDCC) — the last resort
Let's break down the math for each.
1. The "Whale": IRC §45F (business owners only)
If you own an S-Corp or a business with employees, this is the single most underutilized tax strategy in the code. Under OBBBA, the Employer-Provided Child Care Credit got a serious upgrade.
The strategy
Your business pays for the childcare expenses of its employees. This can include you, the owner-employee, provided you don't discriminate in favor of highly compensated employees.
The 2026 numbers
For eligible small businesses, the credit is now 50% of qualified childcare expenses. The maximum credit jumped to $600,000 per year. You can deduct the remaining expense (the amount not claimed as a credit).
How it works
You don't have to build a daycare center in your office lobby. You can contract with a licensed childcare facility to provide care for your employees.
The math
Let's say you own a marketing agency in Scott's Addition. You have $30,000 in childcare costs for your own kids (and you offer the same benefit plan to your staff to meet non-discrimination rules).
| Strategy | Cost to business | Tax credit (50%) | Tax deduction (remaining 50%) | Net after-tax cost |
|---|---|---|---|---|
| Personal pay | $0 (paid personally) | $0 | $0 | $30,000 |
| Business pay (§45F) | $30,000 | $15,000 | $15,000 × 37% = $5,550 | $9,450 |
You just turned a $30,000 personal expense into a net cost of about $9,450. That is 68% savings on childcare.
One important note: this requires strict adherence to non-discrimination testing. You cannot offer this only to yourself. But if you have a small team, the math often works out in your favor even if you subsidize their care too.
2. The "Shield": the enhanced Dependent Care FSA
If you are a W-2 employee (or a business owner who can't pass the §45F discrimination tests), the Dependent Care FSA is your best friend.
The 2026 update
The OBBBA finally lifted the lid on the FSA cap.
The new limit is $7,500 per household (up from the old $5,000). This is an above-the-line pre-tax deduction. It bypasses Federal Income Tax, Social Security, Medicare, and Virginia State Tax.
The math
For a Richmond couple earning $400,000 (37% Federal bracket + 5.75% VA + 2.35% Medicare surtax):
- Contribution: $7,500
- Tax savings: about $3,382
- Real cost of $7,500 care: about $4,118
One warning: the "Use It or Lose It" rule still applies. If you contribute $7,500 and only spend $6,000, that extra $1,500 is gone. But let's be honest, finding $7,500 of childcare expenses in 2026 is unfortunately very easy.
3. The "Scrap": Child and Dependent Care Credit (CDCC)
This is what you get if you don't use the FSA or the §45F credit.
The 2026 reality
While OBBBA improved the phase-outs, high earners ($210k+ AGI) are still capped at a 20% credit rate.
- Expense limit: $3,000 (1 child) / $6,000 (2+ children)
- Maximum credit: $600 (1 child) / $1,200 (2+ children)
The trap
You generally cannot double-dip. You can only claim the CDCC on expenses in excess of your FSA benefits.
Say you have 2 kids and spend $15,000. You elect $7,500 to your FSA. Your remaining expense limit for the credit is zero. The $7,500 FSA completely wipes out the $6,000 expense limit for the credit.
Bottom line: if you are a high earner, the FSA ($3,382 savings) crushes the CDCC ($1,200 savings). Take the FSA every time.
Real-world example: the Miller family
Meet the Millers. They live in Midlothian.
- Sarah: Tech Executive (W-2), Income $250,000
- David: Architect (S-Corp Owner), Income $180,000
- Children: Two kids in daycare ($28,000/year total)
- Tax bracket: 35% Federal, 5.75% VA
Scenario A: the "auto-pilot" mistake
They pay for daycare personally and take the credit at year-end.
- Cost: $28,000
- Tax credit (CDCC): $1,200 (20% of $6,000)
- Net cost: $26,800
Scenario B: the RVA Accountant strategy
Sarah maxes her FSA. David implements a §45F plan at his architecture firm (covering himself and his office manager).
Sarah's FSA: She contributes $7,500 pre-tax. Savings: about $3,000.
David's business (§45F): The business pays the remaining $20,500 of childcare directly to the facility. Credit (50%): $10,250 reduction in tax liability. Deduction: $10,250 deduction on the business return (about $4,000 tax value). Net cost to business: about $6,250.
Total savings for the family: approximately $17,250 compared to Scenario A.
That is the difference between a tax bill and a new car.
Beyond care: the "Trump Account" play
While we are discussing kids and taxes, we have to mention the new Trump Accounts introduced for 2026.
What are they? Tax-advantaged investment accounts for children born 2025–2028.
The perk: The government seeds it with $1,000. You can contribute up to $5,000 per year.
The strategy: Unlike 529s, these aren't restricted to education. This is a wealth-transfer tool. If you have a newborn in 2026, open this account immediately. It doesn't save you on today's taxes (contributions are not deductible), but the tax-free growth is a generational gift.
Common mistakes to avoid
Failing the non-discrimination test (§45F)
If you set up an employer plan and only give it to owners (you), the IRS will disallow the credit. You must offer it to eligible employees.
Missing the FSA enrollment window
FSA elections generally happen during Open Enrollment (Nov/Dec). If you missed it, you can only change it with a "Qualifying Life Event" (birth, change in cost of care).
The "nanny tax" trap
If you hire a nanny directly rather than using a daycare center, you are an employer. For 2026, the threshold is $3,000. You must withhold taxes and file Schedule H. If you don't, you risk losing all your credits and getting hit with penalties.
Forgetting state credits
Virginia conforms to many federal definitions, but always check if your expenses qualify for state-specific subtractions.
FAQ
Can I pay my mother to watch my kids and claim the credit?
Only if she is not your dependent. If you claim her as a dependent on your return, you cannot claim the childcare credit for paying her. Also, you must report the income on her return (she will owe taxes).
Does summer camp count?
Day camp? Yes. Overnight camp? No. If you send your kids to a science day camp in Richmond so you can work, that is a qualified expense.
I'm married but we file separately. Can we both use the FSA?
The limit is split. You each get $3,750. In almost all cases, filing separately disqualifies you from the CDCC entirely.
Tax law is messy. But if we break it down, the path to savings is clear.
Don't let $17,000 of potential savings slip through the cracks this year.
Book your 2026 childcare strategy session — let's build a plan that pays for the daycare so you don't have to.
Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or accounting advice. Consult with your tax advisor before implementing any strategy discussed here.