fringe18-600-04

Fringe Benefits: Part 4

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Part 4: Company-Provided Adoption Assistance

There’s a big demand from couples to adopt children. Because of this, Congress created a nice fringe benefit for adoption expenses. A company can set up a qualified plan and pay up to $13,840 in 2018 of adoption expenses per child on a tax-free basis.

Qualifications Needed to Bulletproof This Benefit from the IRS

In order for a company to provide these benefits tax-free, the adoption assistance must meet the following criteria:

  • The plan must be in writing, and all eligible employees must be notified.
  • The plan must be nondiscriminatory. However, unlike the day-care assistance benefit, there’s no limit on how much goes to the owners or stockholders. The plan just can’t discriminate in favor of highly compensated people, 5 percent or more stockholders, or 5 percent or more owners.

Unfortunately, what Congress gives, it also takes away. The tax credit for the benefits are expected to start phasing out as your adjusted gross income (AGI) exceeds $207,580 in 2018 and completely phases out if your AGI exceeds $247,580 in 2018. As a reminder, your AGI generally means any net income from a business plus dividends, interest, rents, penalties, and wages, with a few further modifications. The following examples will illustrate how the phaseout works.

Example: John and Mary have an AGI of $227,580 in 2018. If they receive from Mary’s employer $6,000 of expenses, only one-half, or $3,000, is tax-free. The other $3,000 is taxable. The reason is that they earn $20,000 more than the allowable $207,580, halfway to the $40,000 phaseout. If their AGI were $217,580one-fourth through the $40,000 phaseout range, one-fourth ($1,500) would be taxable and three-fourths ($4,500) would be tax-free.
Author’s note: Although this is not a tax policy book, think about what Congress has done. This program essentially subsidizes poor to middle-class taxpayers to adopt children and discourages wealthy people, who can best afford children. This also hasn’t been affected by the Tax Cuts and Jobs Act (TCJA).

Also, if you operate as an S corporation and own more than 2% of the outstanding stock, any adoption assistance must be included in wages and also subject to FICA taxes. Of course, you can claim the adoption credit on your individual tax return subject to certain income limitations. However, you are generally better off paying for any adoptions assistance individually and taking the credit on your tax return.


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