No, you would not have been able to deduct $6,000. Please refer to the details below.
First, when you put money from your paycheck into Dependent Care Benefits (generally a Dependent Care Flexible Spending Account (FSA)), you did not pay income taxes on these amounts. They were taken out before all other taxes which means you saved not only income tax, but also Social Security and Medicare which is an additional 7.65%. Therefore, you essentially already deducted the $5,000 and received a tax benefit for it. The amount of your FSA contributions is not included in Box 1 taxable wages on your Form W-2. That is why it is reported separately in Box 10 because it is only taxable if you don't have the eligible expenses to cover it. Therefore, it is correct that this is deducted from your eligible expenses in figuring your credit to avoid double dipping of tax benefits since you've already received a benefit on these amounts.
Next, the Child and Dependent Care Credit is not a deduction from income. The amount is a credit against your tax liability of 20-35% (depending on your income) of eligible expenses. In your case, you have an extra $1,000 to calculate your credit based off. Had you not used the Dependent Care Benefits, then you would have had $6,000 in dependent care expenses. However, you need to look at all factors to determine where the best benefit is.
Please see the following calculations - these are assuming the 25% tax bracket and that you qualify for a 20% Child and Dependent Care Credit (once you exceed $43,000 of adjusted gross income - which is actually lowered due to your Dependent Care contributions - 20% is the maximum credit). Note that putting funds in the Dependent Care FSA lowers your adjusted gross income and could allow for a higher credit percentage.
- By putting $5,000 into your Dependent Care FSA, you saved 25% ($5,000 x 25% = $1,250) as well as 7.65% for Social Security and Medicare ($5,000 x 7.65% = $383) - this is a total of $1,633 saved before the credit
- Next, you have $1,000 in excess expenses to calculate your credit - 20% of this is $200 for a total tax savings between the pre-tax contributions and the credit of $1,833
- Now, say you did not put any money into the Dependent Care FSA with pre-tax funds and used the full $6,000 for the Child and Dependent Care Credit. You would get 20% of $6,000 which is only $1,200.
- Therefore, you actually saved an extra $633 in this specific scenario (income tax bracket and credit bracket). However, in general, it will usually work out to be beneficial or the same.
One of the primary things that would impact this calculation is the tax bracket. Even if you were in the 15% tax bracket, you would still have saved $1,333 in total by using your Dependent Care FSA which is still higher than using the full $6,000 for the Child and Dependent Care Credit.
Note: If you had more than $6,000 in expenses, you should enter all of your expenses. The $6,000 (with 2 qualifying dependents) is the limit for the credit but you can still enter your total expenses.
