I would like someone to check my results here for the upcoming 2023 tax year. It seems like all the information when googling how to calculate the tax credit is exclusively talking about the 2021 changes that only apply to tax year 2021.
Dependent care FSA:
Marginal tax rate= 22% federal + 7.65% FICA + 4% state tax
Maximum contribution= $5000
Dependent care tax credit: (1000*20%)= $200
Tax savings: $1682.5 +$200= $1882.5
Dependent care tax credit:
# of children: 2
MAGI: ~140k
(20% * $6000)= $1200
Adding 2023 tax calculations to the
case study spreadsheet is just about done, with specifics for the child & dependent care credit one of the last remaining pieces. But if you assume that 2023 will be the same as 2022, enter your filing situation, income, and childcare expenses, and change the marginal rate chart independent variable to B6, I think you'll see that the marginal rate for daycare FSA contributions is -13.65%. That's exactly what your numbers suggest: 20% - 22% - 7.65% - 4% = -13.65%.
In other words, the more you contribute to the FSA, the less you will pay in tax. Your marginal tax rates trump the credit percentage.
There is a potential downside to using the FSA, and that is an eventual lower Social Security benefit. Given how far away SS probably is for you (because for most people getting a childcare credit, SS is far away), I'd probably discount that entirely.