My employer is allowing me to increase our Dependent Care FSA contributions to $10,500. Will this negatively impact me if I'm also receiving the child tax credit pmts?

 

Deductions & credits

You are mixing up the credits and they do not affect each other at least for the 2021 return.      If your child care expenses  will be $10,500 or more then using that unusual tax law change will be in your favor.  

 

 

Read all about the form 2441 here :  https://www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs

Deductions & credits

They are two separate credits.  

 

The child tax credit is $3000 or $3600 for any qualifying child dependent.

 

The dependent care credit or FSA is available if you pay for care for your dependent so that you (and your spouse if married) can both work.

 

Note that the enhanced child and dependent credit (for 2021 only) may save you more than increasing your FSA.

 

If your income is less than $125,000, the credit is 50% of eligible expenses up to $8,000 for one child or $16,000 for two children.  Let's say you provide care for 1 child and the cost is $10,000.  If you leave the FSA at $5000, you can claim a credit for $3000 of expenses at 50%, or a tax credit of $1500 on top of your already tax-free FSA amount.  If instead, you increase your FSA to $10,000, you would avoid income tax and social security tax on that $5000 of wages.  Depending on your state income tax rate, that would be a savings of $1200 if you are in the 12% tax bracket, or a savings of $1700 if you are in the 22% tax bracket (compared to a credit of $1500 if you use the credit instead of the FSA).  You may want to analyze the situation to make sure the FSA is the right way to go in your particular situation. 

 

If your income is more than $125,000, the credit percentage is reduced which will generally make the FSA a better deal.