@JJsfr I hadn't considered the extra taxes on the income, or the decreased % of credit, thanks.
I did the math in Google Sheets just now, and for this year, if our AGI is similar to last year's, I'll come out ~$700 ahead with the child care tax credit vs continuing on with the $10,500 DCFSA, and almost $2k ahead if my work never increases the DCFSA limit, even with the extra taxes to be paid and the reduced credit % due to our increased income.
However, if our income goes up by more than $3500, I'll lose money, haha.
If HR never increases the DCFSA limit, obviously the tax credit is worth it, but whew, that's a close calculation right now.
I still think in your scenario the FSA comes out ahead given the credit rate reduction. Assuming you're in CO the tax rate is still 34% with AGI of 150k.
Again to get to $10k post tax to pay daycare you'll still be paying $5k in taxes, and when you fill out the credit work sheet for that $10k you'll get only $3600 in tax credits. You're down $1400 in this scenario.
Even if you think I'm only saving $3400 if I do $10k in the FSA, it's still $10k pre tax and not $15k pre tax, which is required in the example scenario using what I assume are your tax rates. If you were able to do the full $15k into a pre tax FSA (which we know we can't), for the sake of explanation the FSA would now save you $5k in taxes, which is better savings than the tax credit at 36% ($3600) for the same amount of pre tax dollars.
This is why the dollar amount doesn't really matter but the proportion between your tax rate and the credit rate does.
Also, on the total amount note, just because you contribute the $10k ($10,500) to the FSA, doesn't mean you can't claim the credit on the remaining $16,000-$10,500 =$5,500 so you'd still get the credit for all your spending up to that $16k limit, now potentially at a higher credit rate after reducing your AGI by contributing to the FSA, on that remaining $5,500.
Again I may be confused or deluded :) I have been working on my understanding of this for a few weeks now and this is what I've settled on for myself. Our scenario is a bit different. We are in CO but our marginal tax bracket will likely be 12% dropping total tax rate to 24% and favors tax credit over FSA. However, our daycare rates are based on total income, so any reduction in AGI reduces tuition cost but not quite to the same amount as the tax credit would have it if we stopped FSA contributions. However, depending on how well DWs self employment goes, we could either break even and save some $ by having it if she makes more than projected to bump us up (and still reduce tuition), or if she makes less than projected drop to a low enough MAGI for trad contributions with the help from the FSA.
