Child and Dependent Care Credit or Dependent care FSA

[Kaseman412]

In tax year 2020 I had Dependent Care FSA of $5000 excluded from my wages.  That year I also claimed the max out of pocket daycare expenses with the Child and Dependent Care Credit for our 2 children of $6000 (we spend about $25K on daycare each year).  On form 2441 I only received a credit of $200 since my $5K in FSA dollars are excluded from the $6K max allowance and our AGI is about $115K. So 6000-5000=1000. 1000*.2 = $200 credit. 

However in tax year 2021 changes were made and allow up to $18,000 (for 2 children) in care expenses under the Child and dependent Care credit, as well getting a max credit of 50%, and that 50% won't phase out until $125,000.  And the credit is fully refundable. Also, they increased the dependent care FSA contribution limit to $10,500 in 2021. 

So this is my question....Should stop contributing to the PRE-tax dependent care FSA in 2021.  Since that money will be excluded from the $18000 available under the Child and dependent Care credit?

Are these scenarios accurate assuming an AGI under $125K in 2021. I am considering going with scenario 2. Am I getting this correct?

Scenario 1

FSA dependent care dollars $10,500

Child and dependent Care $18,000

Total credit would be $3750:

18,000-10,500=7500, 7500*.5 =$3750

Scenario 2

FSA dependent care dollars $0

Child and dependent Care $18000

Total credit would be $8000

18000-0=18000, 18000*.5 =$8000

[VEpling2 · Accepted solution]

You are asking great questions and have done a lot of research! 

Your figures look right with 2 exceptions.  First the "$18,000" in allowable costs should be $16,000.  The math in your second scenario (18,000 x 0.5 = $8,000) gets to the correct credit amount.  Your math in the first scenario is off though.  $16,000 - 10,500 = 5,500 x 0.5 = $2,750.  

The more important issue you did not consider is the effect of the pre-tax contributions to your FSA.  If you contribute the full $10,500 and your income is in the 22% tax bracket, your tax liability will be approximately $2310 lower.  You also have another $800 is savings not directly related to your tax return since your FSA contributions are not subject to social security or medicare taxes.  That being said, you still come out with a lower overall tax bill using option 2.  

Please note all of this is based on the information you provided and assuming that you are filing a joint return with AGI under $125,000.  

[Kaseman412]

Okay I've edited the scenarios to correct the math.  So scenario 1 tax savings would be $5,860, and scenario 2 total savings would be $8,000. based on AGI of 125K

Scenario 1

FSA dependent care dollars $10,500 

(FSA pretax savings = 2310+800= $3110)

Child and dependent Care $18,000

Total credit would be $3750:

16,000-10,500=7500, 7500*.5 =$2750

Scenario 1 total savings = 3110+2750 = $5,860

Scenario 2

FSA dependent care dollars $0

Child and dependent Care $16000

Total credit would be $8000

16000-0=18000, 18000*.5 =$8000

Scenario 2 total Savings = $8000