My husband and I are going to have our 1st child soon and are unsure how best to plan for the childcare expense with our 2019 taxes in mind. I can take up to $5000 for childcare with a FSA through my work.
From what I understand, you can either do the $5000 FSA or the $3000 tax credit, not both.
Is $5000 in a FSA worth more than a $3000 tax credit?
I'm guessing that with 1 child, the $5000 FSA is the better option for us, but I honestly don't know how to compare the two options. Our childcare cost estimate is about $7000/year.
The FSA (Flexible Spending Account) is for healthcare cost. Per IRS Publication 502 page 15 second column:
You cannot include in medical expenses amounts you pay for the care of children, even if the expenses enable you, your spouse, or your dependent to get medical or dental treatment. Also, any expense allowed as a childcare credit cannot be treated as an expense paid for medical care. http://www.slu.edu/Documents/hr/benefits/IRS%20publication%20502.pdf
So I 'think' you may not be understanding things the way you need to. You really need to see what your specific FSA plan is for. But overall if your plan allows it, I see you already understand you can't double dip here.
You may also want to read tax topic 602 at https://www.irs.gov/taxtopics/tc602 to understand the limits and how your income can affect your ability to claim "any" child care credit regardless of how it's paid.
Congratulations on your upcoming child. The unfortunate answer to your question is that it depends... I would say in general, I think the FSA is the better method for 1 child. Your income level will determine which is best, however.
The effect of the FSA is to take $5000 off of your taxable income. If you are in the 12% bracket, you are basically getting a $965 benefit ($600 Federal, 365 Social Security). The benefit obviously grows the higher tax bracket.
If you do the dependent care credit, you get 20 - 35% of up to $3000 in expenses as a tax credit, so you are looking at a benefit of $600 - $1050. My reading suggests that the 35% is for income $15000 or lower and it decreases by 1% for every $2000 of additional income until you hit $43000 and stays at 20%, so that should help figure out your benefit.
You should be able to run some basic calculations, but I would say if you have more than $21000 (level where you get 32% tax credit) in taxable income, you definitely want to go with the FSA. As you look to the future with a second child, you can take the FSA and do the dependent care FSA for an additional $1000 in expenses ($200 - $350 credit).
Hope that helps.