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CPAs can also make
the employer-provided adoption assistance exclu-
sion. For families with income below the $223,410
this employer assistance is FICA. For families with sure that families are
phaseout threshold, the only tax cost imposed on
income within the $223,410 to $263,410 phaseout
window, however, the benefit of employer-provided aware of methods to
adoption assistance will be further diminished by
phaseouts of the exclusion as well as the adoption
credit. Case 5, in comparison to Case 3, illustrates raise nontaxable funds
the effect.
Case 5: We modify Case 3 to assume that for adoption, such as
the second wage earner also receives $14,000 of
employer-provided adoption assistance. Combined
earnings total $274,000. The increase in after-tax crowdfunding or grants
cash flow attributable to the $14,000 is only
$14,000 in MAGI results in $7,688 of additional and loans.
$6,312 ($26,848 − $20,536), because including the
tax cost ($60,549 − $52,861).
Case 6: We modify Case 3 to change the char-
acter of the incremental income from ordinary to
long-term capital gain (LTCG). The tax on LTCG
is $7,130 (($45,000 × 15%) + (3.8% × 10,000)). The states provide tax benefits only for the adoption of
additional income causes the adoption credit to be a special-needs child. A special-needs child is one
reduced $13,621 to $1,269. The couple’s incremen- who is determined by the state to have a specific
tal increase in cash flow will be only $24,249, the factor or condition that may make placement with
amount realized on the sale of investments less the an adoptive family more difficult. ■
$20,751 ($49,148 – $28,397) increase in tax.
Planning tip: As the cases illustrate, unwary
taxpayers can face marginal tax rates on incre-
mental income that far exceed marginal statutory
tax rates. Families that face losing adoption tax
benefits due to income-based phaseouts should
consider whether they have opportunities to AICPA RESOURCES
shift taxable income to an alternative year. CPAs
Publications
can also make sure that families are aware of
methods to raise nontaxable funds for adoption, Tax and Financial Planning Tips: Welcoming a New Child (client brochure)
such as crowdfunding (see Metrejean and McKay,
Guide to Financial and Estate Planning, Vol. 3 (free for PFP Section members)
“Donation-Based Crowdfunding and Nontax-

able Gifts,” Journal of Accountancy (March 2018))
The Tax Adviser and Tax Section
or grants and loans (Child Welfare Information
AICPA Tax Section members receive a subscription to The Tax Adviser digital
Gateway, “Grants/Loans/Tax Credit for replica online in addition to access to a tax resource library, member-only
Adoption”), and provide clients help in evaluating newsletter, and four free webcasts. The Tax Section is leading tax forward
these alternatives, relative to taxable sources. with the latest news, tools, webcasts, client support, and more. Learn more
at us.aicpa.org/tax-section.
The six scenarios discussed above are summa-
rized in the table “Adoptive Parents’ Marginal Tax
Rates on Incremental Income,” on the previ- PFP Member Section and PFS credential
ous page. Membership in the Personal Financial Planning (PFP) Section provides
access to specialized resources in the area of personal financial planning,
STATE TAX BENEFITS FOR ADOPTION including complimentary access to Broadridge Advisor. Visit the
PFP Center. Members with a specialization in personal financial planning
In addition to the federal tax benefits discussed
may be interested in applying for the Personal Financial Specialist (PFS)
above, 20 states offer tax benefits to subsidize credential.
the cost of adoption. Ohio, for example, offers a
credit of up to $10,000 per adoption. Four of these

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