Can my FSA deductions be added back to my taxable income?

[cyprusonian]

I maxed out my dependent care FSA for 2017 at $5,000. I had over $11,000 in qualifying expenses. I have only one qualifying individual. Do I need to increase my taxable income by $2,000?

Married filing jointly, spouse was full time student for entire year. Currently, taxable income is ~$93,000.

[Opus 17]

Why do you want to increase your taxable income?

If you had a $5000 FSA, that money was subtracted from your income pre-tax and will be reported in box 10 of your W-2.  If you report qualified expenses, that income will remain non-taxed, but you can't claim any additional dependent credit tax credits because you are maxed out for one child.  If you don't report qualified expenses, the amount in box 10 will be added back to your taxable income and you will pay tax on it.

[cyprusonian]

I don't want to increase my taxable income.

According to Turbotax, because I have $5000 reported in box 10 of my W-2, but I only qualify for $3000 in dependent care credits, they will be increasing my taxable income by $2000.

[Opus 17]

That's not how it's supposed to work.  You can have a $5000 FSA OR a $3000 child care credit.  Are you entering the entire amount of qualified expenses? ($11,000?)

[cyprusonian]

Yes, I entered the entire amount of qualified expenses.

[Opus 17]

You may need to call customer support so someone can look at your account while they are on the phone with you.
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The credit calculates correctly using the program installed on my computer, but online may be different and have a bug.  Or you may have made some kind of error.  

You could try going to the Tools menu and removing form 2441, then go back to the dependent care interview and answer the questions again.

[cyprusonian]

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.

[Opus 17]

Well, that $3000 of imputed income for full time students is baked into the law.

But I really think you need to reconsider your thinking here.

By excluding $3000 of care costs, you probably saved around $900 in federal and state income tax, depending on the state you live in.  So your net cost of care was not $11,000, but $10,100.  Its true that if your spouse had worked instead of gone to school, you could have excluded another $2000 of the care costs, saving another $600 in income taxes.  But your spouse would not then have had the benefit of the education, which you must have thought was worth something.  And, if she had simply stayed home and cared for the child, you would have saved the entire $10,100 in net child care costs, but again, foregoing the education that presumably has some benefit.  Making major lifestyle choices based on $600 of tax savings doesn't make a lot of sense to me.

And incidentally, if she had even a small part time job and earned over $5000, you could have excluded the entire $5000 FSA limit from taxation.  You may want to think about that if you are in the same situation this year (expensive care, full time student, $5000 FSA).