QUESTION: We are unsure how the federal tax exclusion for employer-provided adoption assistance benefits interacts with the federal adoption tax credit. If our company offers an adoption assistance benefit, will that reduce or eliminate our employees’ ability to get a federal tax credit for their adoption expenses?
ANSWER: The mere fact that an employee’s adoption expenses are eligible for reimbursement under an employer’s adoption assistance program has no effect on the employee’s ability to claim the adoption tax credit. Consequently, employees can freely choose whether to submit their expenses for reimbursement under an employer’s adoption assistance program (up to that program’s reimbursement limit) or take the federal tax credit. (For 2016, the maximum exclusion for reimbursement under an employer-provided benefit and the maximum tax credit are both $13,460.) Employees with sufficient qualifying expenses could receive both their employer’s maximum reimbursement and the maximum federal tax credit. However, employees cannot “double-dip” by obtaining a reimbursement from their employer and a federal tax credit for the same expense. In that sense, the tax credit and the exclusion for employer-provided adoption assistance are mutually exclusive.
Whether it is better for an employee who cannot fully utilize both the exclusion and the credit to take the credit or submit expenses for reimbursement will depend on the facts and circumstances, so employers should generally avoid providing individualized advice about this choice. For example, sometimes the tax credit may be more advantageous because employer reimbursements are subject to FICA but the tax credit is not. But sometimes the employee may be better off obtaining reimbursement from the employer—for example, if the employee has insufficient tax liability to take full advantage of the credit.
An employee who is reimbursed for an adoption expense cannot decline the exclusion for the employer reimbursement and take a credit for the expense instead. For example, if an employee who has received no previous reimbursements from her employer is reimbursed for half of the $10,000 in qualified adoption expenses that she incurs in 2016 (the year the adoption becomes final), she must claim the exclusion for the entire reimbursed amount before she can take a tax credit for the remainder of her expenses. She cannot decline the exclusion, treat the $5,000 reimbursement as taxable income, and then claim the entire $10,000 as a tax credit. IRS guidance and the instructions to Form 8839—on which both the exclusion and tax credit are claimed—require that any allowable exclusion for employer-provided adoption assistance be claimed first.
For more information about adoption assistance plans and the federal tax credit for qualified adoption expenses, see EBIA’s Fringe Benefits manual at Section III.D.6 (“Important: Both Credit and Exclusion Are Available (but Not for the Same Expenses)”).
Contributing Editors: EBIA Staff.