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The economic

consequences of choices

such as whether both

spouses will work outside

the home differ across

income levels.

he decision to adopt a child has lifelong Tax benefits for parents generally
implications, both emotional and financial. Some of the tax benefits available to adoptive About the
T While adopting through foster care can families apply to parents generally. Specifically, authors
be inexpensive, pursuing a private adoption is an parents with a qualifying child under the age of 17
Kaitlin Newkirk,
expensive endeavor with one-time costs ranging for whom the parents are allowed a Sec. 151 depen-
CPA, MST, is an
up to $70,000 (americanadoptions.com). Families dency deduction are eligible for the child tax credit
assistant professor
looking to fund adoption expenses may seek addi- (CTC), and working parents who pay for the care
of accountancy,
tional sources of income, such as selling investments of a qualifying child under age 13 are eligible for
and David
or temporarily taking on additional work. They the child and dependent care credit (CDCC). For
Randolph, CPA,
may also consider whether both parents will work tax years 2022 through 2025, the maximum CTC is
Ph.D., and Cam
outside the home long term. $2,000 per qualifying child. For tax years after 2025,
Cockrell, Ph.D.,
CPAs can provide a valuable service to families the maximum CTC is $1,000 per qualifying child.
are associate
through education about adoption tax benefits and The CDCC for 2022 and after is 35% of qualify-
professors of
incremental tax costs that accompany a change in ing expenses, with maximum allowable qualifying
accountancy, all at
family income, such as those that arise from choices expenses of $3,000 for one qualifying child and
Xavier University in
about whether both spouses will be employed $6,000 for more than one qualifying child. Thus, the
Cincinnati.
or only one. This article provides an overview of maximum CDCC is $1,050 for parents with one
current tax provisions and illustrates how economic qualifying child and $2,100 for parents with more
effects differ across income levels. Through six cases, than one qualifying child.
we show how the marginal tax rate on incremental An alternative tax benefit to the CDCC offered
family income can vary over 40 percentage points by some employers is the dependent care flexible
depending on the adoptive parents’ circumstances. spending account (DCFSA). Contributions to a
Knowing where perilous increases in marginal tax DCFSA are not subject to federal, state, or Federal
rates exist can help families that adopt a child avoid Insurance Contributions Act (FICA) taxes and
unintended economic consequences. can be withdrawn tax-free by working parents
to pay for eligible child care costs for children
TAX BENEFITS FOR ADOPTIVE PARENTS under age 13 who live with the DCFSA holder
Regardless of whether families pursue a private for more than half the year (e.g., cost of day care,
or foster care adoption, there are tax benefits to preschool, before- or after-school programs, and
subsidize the cost of adoption and child care. For summer camps). For 2022 and after, the DCFSA
2022, tax law provides over $17,000 of potential tax contribution limit for married couples filing jointly
savings to adoptive, working parents. is $5,000. DCFSA funds unspent at year end are

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