Page 198 - JoFA_2022

TAX / PERSONAL FINANCIAL PLANNING

Adoptive parents’ marginal tax rates on incremental income

The first column in each Case 1–4 shows the result with one spouse
employed; the second column shows the result with incremental income
from the second spouse’s employment and child care expenses.

Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
Base earnings $45,000 $45,000 $143,000 $143,000 $215,000 $215,000 $385,000 $385,000 $215,000 $215,000
Incremental earnings - $45,000 - $45,000 - $45,000 - $45,000 $45,000 -
Less: DCFSA contributions - $(2,000) - $(5,000) - $(5,000) - $(5,000) $(5,000) -
Employer-provided
adoption assistance - - - - - - - - $14,000 -
Less: Adoption exclusion - - - - - - - - - -
Incremental long-term
capital gain - - - - - - - - - $45,000
AGI $45,000 $88,000 $143,000 $183,000 $215,000 $255,000 $385,000 $425,000 $269,000 $260,000

Less: Standard deduction $(25,900) $(25,900) $(25,900) $(25,900) $(25,900) $(25,900) $(25,900) $(25,900) $(25,900) $(25,900)
Taxable income $19,100 $62,100 $117,100 $157,100 $189,100 $229,100 $359,100 $399,100 $243,100 $234,100
Income tax $1,910 $7,041 $16,996 $25,796 $33,055 $42,655 $75,375 $88,175 $46,015 $39,805
FICA tax on base earnings $3,443 $3,443 $10,940 $10,940 $12,232 $12,232 $14,697 $14,697 $12,232 $12,232
0.9% Medicare tax on wages
> $250K - - - - - $45 $1,215 $1,575 $171 -
FICA tax on incremental - $3,290 - $3,060 - $3,060 - $3,060 $4,131 -
earnings
3.8% net investment - - - - - - - - - $380
income tax
Less: CTC $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(750) $(2,000) $(2,000)
Less: CDCC - $(600) - - - - - - - -
Less: Adoption credit $(14,890) $(14,890) $(14,890) $(14,890) $(14,890) $(3,131) - - - $(1,269)
Net federal tax cost/
(benefit) $(11,538) $(3,717) $11,046 $22,906 $28,397 $52,861 $89,287 $106,757 $60,549 $49,148
Marginal tax rate 18.19% 29.65% 61.16% 43.68% 59.54% 46.11%

Incremental income $45,000 $45,000 $45,000 $45,000 $59,000 $45,000
Less: Increase in tax $(7,821) $(11,860) $(24,464) $(17,470) $(32,152) $(20,751)
After-tax incremental $37,180 $33,140 $20,536 $27,530 $26,848 $24,249
earnings
Employer-provided
adoption assistance - - - - $14,000 -
Less: Adoption costs paid $(30,000) $(30,000) $(30,000) $(30,000) $(30,000) $(30,000)

Less: Child care costs paid $(5,000) $(5,000) $(5,000) $(5,000) $(5,000) $(5,000)
Net after-tax cash flow $2,180 $(1,860) $(14,464) $(7,470) $5,848 $(10,751)

Source: Kaitlin Newkirk, David Randolph, and Cam Cockrell.

28 | Journal of Accountancy May 2022