Unfortunately, the government only gives you tax benefits on $6,000 of dependent care expenses (with two kids). And these benefits include not only the credit, but also your wages which have already been excluded from tax because of the FSA.
Since $4,000 has been excluded, that leaves $2,000 for the credit. That’s multiplied by 21% in this case (this is the percentage for an AGI equal to or slightly lower than $43k—which is the only thing I’m curious about here, but it only accounts for an extra $20). And the result is the $420 credit amount you’re seeing. (Here’s the IRS telling us about this in Publication 503, and you can see the calculation itself on page 2 of Form 2441, which will be printing out with your return.)
If your marginal tax bracket is higher than the 21% rate of the credit, then maximizing the FSA was a good thing. But if your bracket was lower, that means that less (or no) FSA contributions would have been better overall. Admittedly, that’s an oversimplification, since reducing your “Adjusted Gross Income” with the FSA could also be increasing other tax benefits on the return (which wouldn’t happen by maximizing the credit). And the difference may ultimately not be great enough to justify spending much time on this. But if you’re someone who’s on the lookout for any and all possible tax-savings ideas, this could be one.
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