Wisconsin hasn’t adopted the higher federal dependent care limit for 2026. Here’s what that means for paychecks, W-2s and next year’s tax returns.
Starting in 2026, the One Big Beautiful Bill raised the federal Dependent Care FSA (DCFSA) exclusion from $5,000 to $7,500 ($3,750 for married filing separately), the first permanent increase since 1986. Wisconsin has not followed suit. For Wisconsin income tax purposes, the exclusion remains $5,000 ($2,500 married filing separately).
Why the difference?
Wisconsin generally follows the federal Internal Revenue Code only as amended through December 31, 2022. Federal changes enacted after that date, including most of the One Big Beautiful Bill, don’t apply in Wisconsin unless the Legislature adopts them. *
How Wisconsin compares
Wisconsin is one of only three states confirmed to still cap the state exclusion at $5,000 for 2026 (along with California and Arkansas). Most states have already aligned with the $7,500 federal limit, either automatically or through 2026 legislation. Illinois, Louisiana and Oregon, for example, all follow the federal limit. A handful of states have not yet issued clear guidance, so multistate employers should confirm each state’s treatment with their payroll provider.
What it means for participants
If you elected more than $5,000 for 2026, the amount above $5,000 is still tax-free federally but is taxable income in Wisconsin. An employee who elects the full $7,500 will have $2,500 of Wisconsin-taxable income. Depending on their tax bracket, that’s roughly $110 to $190 in additional Wisconsin tax.
The higher election can still be worthwhile. The federal income tax and FICA savings on that extra $2,500 generally outweigh the Wisconsin tax. Participants should simply plan for it rather than be surprised at tax time.
What it means for employers
- W-2 Box 16 will differ from Box 1 – Wisconsin taxable wages must include DCFSA amounts above $5,000. **
- Withholding – Payroll should withhold Wisconsin income tax on the excess. Employers who haven’t been doing so should talk with their payroll provider about a year-end trueup.
- Communication – Participants electing above $5,000 should know about the state tax impact, especially during 2027 open enrollment.
Will Wisconsin catch up?
Not yet. Assembly Bill 870 (Senate companion SB 859) would have adopted the federal $7,500 limit for Wisconsin beginning with the 2026 tax year. The State Assembly passed AB 870 on February 19, 2026, by a vote of 58-35, but the bill ultimately “died” without a vote in the Senate prior to the session’s final floor period.
Diversified recently reached out to several local lawmakers for a status update, and the message was clear: the path forward depends on the upcoming November elections, which will decide who holds the governor’s office and the makeup of the State Legislature. Meaning no legislation will move forward before the 2027-28 session convenes in January. Until then, the timing of any fix, and whether it would apply retroactively to the 2026 tax year, remain open questions.
Until those under the capitol dome in Madison act, employers and participants should plan on a $5,000 Wisconsin limit for at least 2026. In the meantime, our government relations team is tracking this issue closely and engaging with members of the State Assembly/State Senate on the importance of conformity for working families. We’ll follow up once the new session begins and share updates here.
*Per Wisconsin Dept. of Revenue Tax Bulletin 234 (July 2026)
**Box 16 may also differ for other reasons in 2026, including employer contributions to Trump Accounts and employer student loan payments, neither of which Wisconsin excludes.