Child Care Tax Credit + DCFSA Contributions

[Lucky Recardito]

Seeking help understanding how DCFSA contributions should impact the Child Care Tax Credit on my 2023 taxes.

Childcare expenses paid in 2023: ~$42k (2 kids; FT care)
2023 AGI: ~$320k (MFJ)
2023 DCFSA contribution: $5k (max)

My simplistic understanding is that we should be getting a $1200 Child Care Tax Credit (20% of $6k) -- but my husband's employer listed his $5k DCFSA contribution in box 10 on his W2, as Dependent Care Benefits, and on form 2441 that's reducing the $6k eligible benefit down to $1k, so I'm calculating a $200 credit (20% of $1k) instead of $1200. But... FreeTaxUSA (where I'm working on my return) tells me that Box 10 on the W2 should be used for expenses the employer paid on our behalf -- whereas this $5k was our contributions to that DCFSA plan.

If I remove the $500 from my husband's W2, I see the full $1200 credit return.

Anyone have clarity on whether my credit should be $1200 or $200? I've never questioned this before but it's suddenly feeling off.

TY!

[Gin1984]

No, you get $200.  6000-5000 (FSA)=1000.  1000*.2=200

[EvenSteven]

No, you get $200.  6000-5000 (FSA)=1000.  1000*.2=200

This is correct, and I did a google search to find some quick articles to post in support of this, but unfortunately it turned up a bunch of AI generated slop with the same misleading information suggesting you could take full advantage of both. So I had to go straight to the IRS for the correct supporting information.

https://www.irs.gov/publications/p503

Specifically:

If you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if you had one qualifying person or $6,000 if you had two or more qualifying persons) in order for you to claim a credit on the remaining amount. (If you had two or more qualifying persons, the amount you exclude or deduct will always be less than the dollar limit because the total amount you can exclude or deduct is limited to $5,000. See Reduced Dollar Limit under How To Figure the Credit, later.)

And

If you received dependent care benefits that you exclude or deduct from your income, you must subtract that amount from the dollar limit that applies to you. Your reduced dollar limit is figured on Form 2441, Part III. See Dependent Care Benefits, earlier, for information on excluding or deducting these benefits.

Example 2. Randall is married and both he and his wife are employed. Each has earned income in excess of $6,000. They have two children, Anne and Andy, ages 2 and 4, who attend a daycare facility licensed and regulated by the state. Randall's work-related expenses are $6,000 for the year. Randall's employer has a dependent care assistance program as part of its cafeteria plan, which allows employees to make pre-tax contributions to a dependent care flexible spending arrangement. Randall has elected to take the maximum $5,000 exclusion from his salary to cover dependent care expenses through this program. Although the dollar limit for his work-related expenses is $6,000 (two or more qualifying persons), Randall figures his credit on only $1,000 of the $6,000 work-related expense paid. This is because his dollar limit is reduced as shown next.
    
Randall's Reduced Dollar Limit
1)   Maximum allowable expenses for twoqualifying persons   $6,000
2)   Minus: Dependent care benefits selected
from employer's cafeteria plan and
excluded from Randall's income   −5,000
3)   Reduced dollar limit on work-related expenses
Randall can use for the credit = 1,000

[Lucky Recardito]

Thanks for the clarity -- I appreciate it!

(Looking back, this is clearly the way it came out last year, but I didn't have the mental space to question it at that moment...)