Why is using a dependent care FSA costing us money?

[Anonymous]

We have two kids in daycare, that cost 24,137 dollars this last year. My wife has a dependent care FSA which she puts 5,000 a year into and uses entirely (Box 10 of a W2). I noticed as soon as I put in that value in the tax software, our taxes go up by 1,000. Playing around with it, I found it's because we lose 5,000 dollars from the Child and Dependent Care Credit - reducing the 6000 credit by 5000, then multiplying by 20%, changes the credit from 1200 to 200. I'm misunderstanding, but it seems like that means we pay what's an equivalent to a 20% tax on the 5000 dollars, which is higher than where we're likely to end up. Does it make sense to other people, or are we somehow using it wrong? We have an FSA through her work, we pay the daycare, and we get reimbursed via the work - that's the only way they let us do it.

[Anonymous_]

See Solved: Child Tax Credit (intuit.com)

[Jimi1970 · Accepted solution]

What you're not taking into account is the fact that the $5000 you put into (and subsequently get back from) the FSA is tax-free. If you didn't have an FSA and received that $5000 in your paycheck, you would owe an additional $1100 in tax (assuming your marginal tax rate is 22%).

[Anonymous]

Thanks for the response - I had considered that, I think I was just surprised that the FSA vs taxes was only a 100 dollar difference, especially how much I've heard about how much it can save, etc. It's a very aggravating process with our provider and employer, so I think I overestimated it's worth.