Child & Dependent Care Credit in Conjunction with Dependent Care FSA

[cawelch45]

I am trying to understand the relation (if any) between the Child & Dependent Care Credit (especially with the updates from the American Rescue Plan) and a Dependent Care FSA.  Are the two mutually exclusive or if you utilize a DCFSA does that mean you can't take advantage of a portion or all of the C&DCC?

The DCFSA let's you reduce your taxable income while the C&DCC gives you an actual credit but they are looking at the same pool of money (the money you spend on child care.)   Is it something to where the C&DCC can only be utilized for child care expenses above and beyond they amount you designated for your DCFSA?

I just can't see how the IRS would let you get a deduction and a credit off of the same money and if not then it would seem to me, based on your income and the expanded C&DCC through the American Rescue Plan, that one would might be better off not using a DCFSA and taking advantage of the credit that the C&DCC provides.

Much obliged for anyone helping educate me on this.

[Mike9241]

say you or your employer put $2,000 into a FSA for dependent care. this reduces the maximum amount that can qualify for the credit and the amount of qualifying expenses.

using 2020 as an example say you paid $10000 for these expenses. qualifying expenses would be $8,000 and the $3,000 limit for the credit would be reduced to $1000

[cawelch45]

Much obliged.

[Opus 17]

They work together, the FSA reduces the expenses eligible for the credit.  For 2021, the FSA maximum is $10,500 and the dependent care credit is based on a maximum of $8000 of qualifying expenses for 1 child and $16,000 of expenses for 2 or more children.  Any amount in the FSA will reduce the amount of eligible expenses that you can apply to the credit.

In general, the credit is so much higher for 2021, that most people will see a larger tax benefit from the credit than the FSA, for incomes less than $125,000.  However, this would have to be tested for each taxpayer's unique facts and circumstances. In previous years (and in 2022, unless Congress extends the enhanced credit) the FSA is better except for people with gross income less than about $30,000.  

[cawelch45]

Much obliged.  I saw the updated values for the credit and was walking down that thought process and was coming to the same conclusion of in most cases not increasing the FSA contributions makes the most sense so you can take advantage of the credit.  CREDITS > DEDUCTIONS.  Appreciate the response.