Dependent Care FSA Increase... Does it make sense? Can someone check my work?

Recently, the Dependent Care FSA contribution limit was increased for 2021 only to $10,500. My immediate thought was that it makes sense to immediately increase the contributions to the FSA to the max, since childcare is ridiculously expensive, but upon further research, I think I was wrong because I'd potentially be giving up the Dependent Care Tax Credit. 

Here is my current understanding and line of thought: 

1. You get a tax credit for 50% of your childcare costs up to $8,000 (meaning, a credit of $4,000 for one child, or $8,000 for 2 or more)
   1. This scales down starting at an AGI of $125k by 1% for every $2k down to 20% at an AGI of $180k
2. You can't double dip. What this means is, if you use the FSA to pay for childcare, the amount that you use from the FSA does not count towards your childcare costs for the Dependent Care Tax Credit.
3. The comparison here is the refundable tax credit (which is 20% to 50% of up to $8k) against the income tax savings of 12%, 22%, or 24% for most people
4. At a certain point - $181k AGI, assuming married filing jointly with the standard deduction - you'd want to max out the FSA contributions. But until you're at that point...
5. You only want to contribute your childcare costs more than $8,000 to the FSA (or $16,000 for more than one child). Stated another way: Your FSA contribution should be (Total Childcare Cost)-(8,000). 

Is that correct? Have I misunderstood something here, or totally butchered a calculation? Anyone else been trying to figure this out?

Great questions. Unfortunately I'm not much help as my youngest is going to kindergarten next fall, so no more daycare $$ for us!

Yes, there are still probably other costs we could fit in, but there is cost in the overhead of remembering, keeping receipts, submitting for reimbursement, etc. With big daycare payments it was simple for us but we have decided without daycare the FSA use will be minimal.

Also, I could be remembering wrong, but the FSA amounts were set during annual open enrollment... Can you change more frequently than that?

Robbie (Forum Supporter) said:

Great questions. Unfortunately I'm not much help as my youngest is going to kindergarten next fall, so no more daycare $$ for us!

Yes, there are still probably other costs we could fit in, but there is cost in the overhead of remembering, keeping receipts, submitting for reimbursement, etc. With big daycare payments it was simple for us but we have decided without daycare the FSA use will be minimal.

Also, I could be remembering wrong, but the FSA amounts were set during annual open enrollment... Can you change more frequently than that?

This year due to all the craziness still going on, you can change at any time, though you may have to jump through employer hoops to do so. 

mtn said:

Anyone else been trying to figure this out?

Nope, but I will be now. Thanks for the heads up on this!  Sounds like the DCFSA increase is also only optional for employers to offer, so the math may not be the determining factor.

Off hand, do you know anything about how DCFSA changes would or wouldn't be handled regarding retroactive application to prior months, both for increasing and decreasing the DCFSA election?

Driven5 said:

mtn said:

Anyone else been trying to figure this out?

Nope, but I will be now. Thanks for the heads up on this!  Sounds like the DCFSA increase is also only optional for employers to offer, so the math may not be the determining factor.

Off hand, do you know anything about how DCFSA changes would or wouldn't be handled regarding retroactive application to prior months, both for increasing and decreasing the DCFSA election?

You can't do anything about what's in the past. Can't retroactively contribute. So my friend, who went full out for it for two kids, is now paying something like $1,200 a month to it for the rest of the year to get to $10,500. Obviously not an issue, he is spending more than that a month for childcare, but it takes a bit more attention to the bank accounts each month to make sure that he gets the claim back in time. 

So employers have until November 23rd of 2021 to decide whether or not to even offer the FSA bump from 5k to 10.5k for 2021 tax year to their employees, and if they wait until then the employees can only pull the extra from/for December with no retroactive applicability?... Well that's minimally better than useless.

Driven5 said:

So employers have until November 23rd of 2021 to decide whether or not to even offer the FSA bump from 5k to 10.5k for 2021 tax year to their employees, and if they wait until then the employees can only pull the extra from/for December with no retroactive applicability?... Well that's minimally better than useless.

If it takes them that long, then yes. Or maybe your plan would allow for it? Our plan, the only way to contribute to it is via payroll deduction.

In thinking about it more, for married couples (assuming dual-income since needing regular child care) it would be possible to just grab $5k from each employer if desiring an increase of DCFSA to at least near the limit without having to worry about employer implementation.

Fundamentally though, I think that you're right. You want to maximize whichever is greater between your total income tax rate vs the Child and Dependent Care Tax Credit rate for your income level... But when doing the math, don't forget to include SS, Medicare, and State income tax on top of the Federal income tax rate.

The other part of that to consider, is the effect of any potential mid-year income increases that could change the math before years end. If near the cross-over point, going with the extra DCFSA would provide more certainty, while the CDCTC would have more variability.