"Great! It appears we can get 20%-35% * $3000 for one dependent or * $6000 for two dependent, depending on our MAGI. Correct? "
Correct. Note that this is a credit, not a deduction (which is often better, but it depends on a lot of factors).
"So, if we put $5000 into the FSA, we should be able to save around $5000 * (7.65% + fed + state + local tax rates). Correct? "
Correct, if I understand you. Amounts that appear in an employer-sponsored FSA appear in box 10. This same amount - if you document that you spent it all on qualifying dependent care - is removed from boxes 1, 3, and 5. Since boxes 3 + 5 are generally 7.65% of your income, then, yes, that amount is saved.
Furthermore, you are saved the margin tax rate time the box 10 amount off your federal income taxes. I said. "marginal tax rate", not "effective tax rate".
The marginal tax rate is the amount of tax you pay on the next dollar earned. This normally is the tax bracket you are in. So if you are in the 12% tax bracket, then the amount in box 10 times 12% would be the amount that you would save, other things being equal (like the reduction in income doesn't drop you into another tax bracket).
It is difficult to compare credits and deductions, because they work differently. I suggest that you create a dummy account if you are Online and enter your data with and without $5,000 in box 10 to see if the credit or the deduction works better for you. Note, on the return that has $5,000 in box 10, you will need to remove $5,000 from boxes 1, 3, and 5 on your W-2.
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