Upon further inspection, I have discovered something disappointing.
One of the requirements for receiving dependent care benefits, is that both you and your spouse have earned income (if married). The maximum dependent care benefit that can be excluded from your income is the smallest of:
A) Your dependent care benefit
B) Your earned income
C) Your spouse's earned income
Because my spouse was a full time student in 2017, her earned income is $3000.
Therefore, $2000 of the $5000 dependent care benefit I received is taxable.
I think this is disappointing because if my wife had worked instead of going to school, we would likely have had a higher dependent care benefit, because her earned income would have likely been greater than $3000.
