Dependent Care Credit Calculation Does Not Seem Correct

[amolson819]

In 2022 we spent just over $18,000 in childcare expenses for our two kids that are under the age of 13. Based on the IRS Form 2441 instructions and our AGI, it seems that I am eligible to receive 20% of the $6,000 max credit ($1,200). Turbo Tax is only calculating $200. Do you know why that might be? 

Another note, I did have an FSA in which we contributed $5,000 for dependent care. 

Thank you in advance. 

[RalphH1 · Accepted solution]

Unfortunately, the government only gives you tax benefits on $6,000 of dependent care expenses (if you have two youngsters). And these benefits include not only the credit, but also your wages which have already been excluded from tax because of the FSA.

Since that’s $5,000, that leaves $1,000 for the credit x 20% = the $200 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 20% 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,  this is 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 the time spent analyzing this. But if you’re someone who’s on the lookout for any and all possible tax-savings ideas, this could be one.

[amolson819]

Thank you @RalphH1. This is what I thought but all of the articles/other questions were kind of fuzzy with their answer (I had to make sure I was not leaving $1,000 in credits on the table). The examples in the Pub 503 article you provided were the best examples I've read and made it very clear. Great answer!