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TAX / PERSONAL FINANCIAL PLANNING

Child care expenses paid exclusion in the same tax year. If claiming both,
Taxpayers can claim both the credit and the

with DCFSA funds are taxpayers are required to first claim any allowable
exclusion and reduce the amount of the quali-
fied adoption expenses available for the credit by
not eligible for the CDCC, the amount of any employer-provided assistance
excluded from income. The result is that the credit
so taxpayers must choose and exclusion cannot both be claimed for the
same expenses.
For example, if a taxpayer incurs $20,000 of
between the two tax qualifying adoption expenses and receives $14,890
of employer-provided assistance, the taxpayer can
exclude the $14,890 from income and claim a
benefits for the amount credit of only $5,110. If qualifying expenses in the
same example are $30,000, the taxpayer can exclude
of expenses eligible for $14,890 from income and claim the maximum
adoption credit of $14,890, but will not receive any
tax benefit for the remaining $220 of expenses. The
either benefit (up to adoption credit is nonrefundable but can be used
to offset the alternative minimum tax. Any unused
$3,000 after 2021). credit can be carried forward for up to five years.

REDUCTIONS AND PHASEOUTS
It is important for adoptive families to understand
the economic costs imposed by the income-based
reduction to the CDCC percentage and the phase-
outs of the CTC and adoption credit and exclusion.
For the years 2022 and after, for married couples
both domestic and foreign adoptions, amounts paid filing jointly, the CDCC percentage is reduced
during or subsequent to the year the adoption is from 35% to 20% as AGI increases from $15,000
finalized are allowable for the year of payment. to $43,000. For the years 2022 to 2025, under the
Planning tip: The timing provisions may pro- rules enacted in the law known as the Tax Cuts and
vide an incentive to defer the payment of qualifying Jobs Act (TCJA), P.L. 115-97, the CTC for mar-
expenses to the year following the adoption, and ried couples filing jointly is reduced $50 for every
thus defer the tax benefit, if the income-based $1,000 of modified adjusted gross income (MAGI)
phaseout of the tax benefit in the year following the in excess of $400,000. For years after 2025, the
adoption would be less than the phaseout in the phaseout rules for the CTC will revert to the rules
year of the adoption. that were in place before the passage of the TCJA.
The adoption credit and exclusion are each Under these rules, the CTC for married couples
subject to a dollar limitation and an income-based filing jointly is reduced $50 for every $1,000 of
phaseout. The dollar limitation, which is indexed MAGI in excess of $110,000. For purposes of the
annually for inflation, is $14,890 per child for CTC, MAGI is AGI increased by any amount
2022, and applies separately to the credit and the excluded from gross income under Secs. 911, 931,
exclusion. Parents must reduce the dollar limit for a and 933 (relating to foreign earned income and
year by the amount of qualified adoption expenses income from certain U.S. territories).
they paid and claimed in previous years for the For the adoption credit and exclusion of
same adoption effort. Also, in computing the dollar employer-provided adoption assistance, the
limitation, qualified adoption expenses parents have phaseout is based on MAGI. However, MAGI
paid and claimed in connection with an unsuc- is computed differently for purposes of the credit
cessful domestic adoption effort must be combined and exclusion. Like MAGI for CTC purposes, for
with qualified adoption expenses paid in connection purposes of the credit and the exclusion, in deter-
with a subsequent domestic adoption attempt, mining MAGI, AGI is increased by any amount
whether or not the subsequent attempt is successful. excluded from gross income under Secs. 911, 931,

26 | Journal of Accountancy May 2022