OK, here's the scoop and I think this link explains it pretty clearly ....
https://ttlc.intuit.com/community/tax-credits-deductions/discussion/dependent-care-expense-account-r... In a nutshell, the FSA Dependent Care Deduction you have withheld from your paycheck all year is an "advance" on your year end tax credit. If it turns out that you are not eligible for the tax credit, 100% of what was withheld becomes taxable. If you are eligible for the credit, you already received an advance on the credit through the FSA payroll withholding (it was not taxed), so that amount is deducted from your total possible credit at year end. You don't get the credit twice! Turbo tax is not "taxing" it by adding it back, it is simply reducing your total eligible credit by the amount you already received throughout the year in your paycheck.
