$5,000 is the limit per year that you can spend on child and dependent care expenses and have those expenses cover your contributions to your FSA.

To be able to exclude contributions to your Dependent Care FSA (box 10 on your W-2), you have to show that you spent the money on child and dependent care.

You got a $3,500 tax benefit in 2019, but carried forward $1,500 to 2020. You contributed $5,000 in 2020, for a total of $6,500 available for 2020. Then in 2020, you spent $6,000, which covered the $1,500 from 2019 and $3,500 of the 2020 FSA contribution. Since you carried over $500 to 2021, this leaves $1,000 in 2020 which is not covered by qualified child and dependent care expenses.

That $1,000, which had been excluded from income, gets added back to income because it was not able to be applied to any qualified expenses (which are indeed limited to $5,000/yr).

Thank you! Wouldn’t carrying forward $1,500 from 2020 into 2021 then not result in being taxed on the $1,000 if used during the grace period for qualified expenses?

"Wouldn’t carrying forward $1,500 from 2020 into 2021 then not result in being taxed on the $1,000 if used during the grace period for qualified expenses?"

Well, yes, except you have already spent the money in 2020. You don't have any money (beyond the $500 that you did not spend) to carry forward to 2021.