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Taxpayers can claim both
and 933 (relating to foreign earned income and
income from certain U.S. territories). For purposes
of the exclusion only, however, in determining the credit for qualifying
MAGI, AGI is further increased by the amount
of the exclusion from gross income for employer-
provided adoption assistance and the deduction for adoption expenses and
interest on qualified education loans. For 2022, the
phaseout applies to MAGI ranging from $223,410
to $263,410. The phaseout is proportional across the income exclusion
this range. If a taxpayer’s MAGI is $223,410 or
MAGI is $263,410 or more, the credit or exclusion for employer-provided
less, the credit or exclusion will not be affected; if

is zero.
adoption assistance in
ECONOMIC EFFECTS
The following six scenarios illustrate how these the same tax year.
rules affect adoption expenses as well as the
marginal tax rate on incremental family income. As
will be seen, the economic consequences of choices
such as whether both spouses will work outside the
home differ across income levels. We assume that
the changes instituted by the American Rescue
Plan Act, P.L. 117-2, are not extended or made
permanent and that the CTC and CDCC revert Case 2: Avery and Alex earn a combined
to pre-2021 levels. Also, because state and local $188,000. The CDCC is the only tax benefit subject
income tax effects vary by locale, we do not estimate to phaseout. They fully fund a DCFSA because it
them in our analysis. State and local taxes are an offers greater tax savings than the CDCC (marginal
important consideration, however. We provide a tax rate > 20% CDCC). The spouse with wages
summary of adoption tax benefits by state in a table below the FICA limit funds the DCFSA in order
on page 30. to take advantage of FICA tax savings. Their
incremental after-tax earnings are $33,140.
Base facts Case 3: Avery and Alex earn a combined
Avery and Alex are married taxpayers who file $260,000. The CDCC and adoption credit are
jointly. During 2022, they adopt a qualified child subject to phaseout. The lower wage earner fully
under the age of 6 and pay $30,000 of qualifying funds the DCFSA. Their incremental after-tax
adoption expenses. If both are employed, they will earnings are $20,536.
incur $5,000 of qualifying child care expenses (for Case 4: Avery and Alex earn a combined
simplicity, we choose $5,000 because it is the maxi- $430,000. The CTC, CDCC, and adoption credit
mum amount allowable pre-2021 for purposes of are all subject to phaseout. The lower wage earner
the DCFSA). If only one spouse is employed, they fully funds the DCFSA. Their incremental after-tax
will not incur child care expenses and will forgo earnings are $27,530.
$45,000 in earnings. The only MAGI modification Planning tip: In order to comprehensively
applicable to them is the adjustment for adoption evaluate the financial effects associated with both
assistance. parents working outside the home, it is important
Case 1: Avery and Alex earn a combined to consider nontax costs of employment. An
$90,000. The CDCC is the only tax benefit subject incremental increase in after-tax earnings from
to phaseout. Because the CDCC offers greater tax having two wage earners would be diminished by
savings than the DCFSA for up to $3,000 of quali- the cost of child care and other expenses associated
fying child care expenses (20% CDCC percentage > with employment, such as transportation, clothing,
marginal tax rate), they choose to make only $2,000 etc. After-tax earnings could be enhanced, however,
of DCFSA contributions ($2,000 = $5,000 total if the family receives employer-provided adoption
expenses − $3,000 CDCC limit). Their incremental assistance.
after-tax earnings are $37,180. The fifth scenario, discussed next, illustrates

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