Adoption Tax Credit

The adoption procedure can be time-consuming and costly. But in addition to other advantageous tax treatment relating to employer-provided adoption assistance, the IRS now grants an adoption tax credit to provide relief from some of these fees and costs. These adoption tax benefits are available to the majority of adoptive parents.

What is the Adoption Tax Credit ?

To promote adoption in the United States, an adoption tax credit is offered to adoptive parents. The adoption tax credit is a nonrefundable tax credit designed to help you offset certain adoption-related expenses that you incur.

Individual taxpayers who pay or incur "qualified adoption expenses" are eligible for an adoption tax credit under Section 36C of the United States Internal Revenue Code. When adoptive parents pay out-of-pocket costs associated with the adoption, they may be eligible for the adoption tax credit. These costs consist of travel costs, court costs, and attorney fees. Your spending has a direct impact on the tax credit's size.

Because the adoption tax credit is nonrefundable, you can carry forward any unused portion for up to five years if you can't use the entire value in the first year you claim it. You must meet the modified adjusted gross income (MAGI) requirements and submit Form 8839, Qualified Adoption Expenses, in order to be eligible for the adoption tax credit.

According to the IRS, an eligible kid is any individual who is younger than 18 years old or who, regardless of age, meets the criteria for a disability and is incapable of taking care of oneself physically or mentally.

Key Facts of Adoption Tax Credit 2023

  • Adoptive parents who incur out-of-pocket costs for the adoption of their child may be eligible for an adoption tax credit.
  • Depending on your modified adjusted gross income, the adoption tax credit is phased out.
  • Prior to the identification of the child or the conclusion of the adoption process, expenses related to the adoption may be eligible for credit.
  • For domestic, international, and special needs adoptions, there are different laws and requirements for adoption tax credits.
  • An eligible child must be younger than 18 years. If the adopted person is elderly, they must be unable to care for themselves physically.
  • Adoption-related charges, including as court fees, adoption, and attorney fees, that are reasonable and necessary are defined as qualified adoption expenses by the IRS.
  • Each qualifying adoption expense credit and deduction is subject to a dollar limit and an income limit.
  • A registered domestic partner may in some circumstances cover the adoption expenses.

How Does the Federal Adoption Tax Credit Work ?

The Internal Revenue Service (IRS) states that tax benefits for adoption include both an exclusion for employer-provided adoption assistance as well as a tax credit for qualified adoption expenses paid to adopt an eligible child. The adoption tax credit begins to phase out when MAGI exceeds an amount set every year and is eliminated when modified adjusted gross income exceeds a maximum amount.

How much you spend on an adoption affects the credit amount that you are eligible to claim. For instance, you cannot claim the whole $14,890 credit if your qualified adoption expenses in 2022 totaled just $8,000. Similar to this, you may only claim the maximum credit value if you spent $25,000 in costs.

Who Qualifies for Adoption Tax Credit ?

For qualified out-of-pocket expenses related to an adoption that fulfill specific eligibility requirements, an adoption tax credit is available. The credit can be used to offset costs associated with domestic, international, and special needs adoptions.

With a few exceptions, the majority of adoptive parents are eligible for the adoption credit. For this tax benefit, the IRS provides a phaseout range based on modified adjusted gross income (MAGI). The thresholds have an inflation index. In addition, adoption tax credit is not available for adoptions of stepchildren.

Adoption Tax Credit Income Limit

The phaseout ranges for the adoption tax credit are determined by the taxpayer's modified adjusted gross income (MAGI). If your MAGI is higher than the IRS allowable range upper limit, you are not eligible to claim the adoption credit.

If your modified adjusted gross income is equal to or less than $223,410 for 2022, the entire $14,890 adoption tax credit is available to you. You will receive a reduced tax credit if your modified adjusted gross income is greater than $223,410 but less than $263,410. You are not qualified for the adoption tax credit if your MAGI for the year is $263,410 or above.

For the tax year 2023, you are eligible for the full adoption tax credit, if your modified adjusted gross income is $239,230 or less. The credit phases out as your income increases and goes away completed when it exceeds $279,230.

Eligible Children For Adoption Tax Credit

To be eligible for this credit, you must adopt a child who is eligible and pay all qualified adoption expenses out of your own pocket. An eligible child is :
  • Children who are under the age of 18 are eligible.
  • A child of any age who is a citizen or resident alien of the United States and is physically or mentally incapable of caring for themselves.

Note :
If a successful adoption occurs after a failed one, the unsuccessful adoption's expenses might be eligible for the credit, but the two adoption attempts would be treated as one adoption and subject to the monetary limit per eligible kid.

Special Needs Children

Because they are often in foster care, special needs children are those who receive adoption aid or adoption subsidy benefits. Benefits are granted because the state believes that the child wouldn't be adoptable without them, and they can include Medicaid or reimbursement of certain expenses.

They must satisfy each of these three requirements in order to be considered a child with special needs :
  • The child is a citizen or resident of the US.
  • A state determines that the child should not or cannot be returned to the parents' house.
  • The state determines that without help from the adoptive parents, the child won't be adopted.

In general, you are qualified to claim the entire credit in the year the adoption is finalized if you adopted a kid with special needs. You won't be eligible for further federal tax benefits associated with the adoption in subsequent years after you adopt your child and claim the adoption credit. Your child is now eligible to be claimed as a dependent on your tax return.

How Much is the Adoption Tax Credit ?

The adoption tax credit increases a little each year because it is inflation-indexed. The maximum credit amount allowed for adoptions is $14,890 per child for 2022 and $15,950 for 2023.

Additionally, because the adoption tax credit is no longer refundable, your overall tax must be at least equivalent to the credit in order to fully benefit from it. If your costs fall below this threshold, you may carry over any unused credit for a maximum of five years.

Even though your out-of-pocket expenses are less than the tax credit amount, you might be eligible to claim the full amount of the credit if you adopt a child with special needs.

What are Qualified Adoption Expenses ?

Qualified adoption expenses (QAE) are calculated by adding up all expenses related to the adoption, then subtracting any amounts reimbursed or paid for by your employer, another organization or a government agency.

Qualified adoption expenses are any reasonable and necessary costs directly associated with the formal adoption of a child, according to the IRS. Through the adoption credit, these become eligible for reimbursement or refund.

Expenses that qualify include :
  • Adoption fees that are essential and reasonable.
  • Legal fees and court costs.
  • Travel expenses related with adoption, like meals and lodging.
  • Other costs directly related to the legal adoption of a child who qualifies.

When to Claim the Adoption Tax Credit ?

If you paid your expenses before the adoption was legally finalized, you can still claim the adoption credit in the tax year that followed. Expenses incurred in the year the adoption was finalized can be written off in that year.

If the adoption is for a child with special needs or is international, you must claim the credit in the tax year that the adoption is completed. A non-finalized overseas adoption cannot be credited.

For domestic adoptions without special needs, you must deduct any expenses either in the year of finalization or, if the adoption is not completed, in the year in which they were paid (if the adoption is not finalized, you must deduct the expenses in the year in which they were paid).

You can claim the maximum credit for special needs adoptions without incurring any costs in the year the adoption is finalized. You can only deduct expenses you incurred for unsuccessful US special needs adoptions, and you must wait until the tax year after the year the expenses were incurred.

If the adopted child does not yet have a Social Security number, you must seek for an Adoption Taxpayer Identification Number (ATIN) before you may start deducting the adopted child as a dependent.

How to Claim the Adoption Tax Credit ?

To claim the adoption credit, complete Form 8839 and attach it to your Form 1040

Documentation related to adoption is no longer required to be included with your federal tax return, but you should still maintain it for your records. The adopted child's first and surname names, birth date, and identification number must be provided by the taxpayer. They must also note whether the child is foreign-born or special needs,

What is Form 8839, Qualified Adoption Expenses ?

To calculate your adoption credit and any employer-provided adoption benefits you can deduct from your income, use form 8839. You can claim both the credit for expenses and the exclusion of adopting an eligible child.

Frequently Asked Questions

What Are Qualified Adoption Expenses?
The costs necessary to adopt a child under the age of 18 or any disabled person who needs care are considered qualified adoption expenses. Qualified adoption expenses (QAE) are costs that can be used to claim an adoption credit or exclusion that lowers the adopting parents' taxable income in the United States. They are costs that the Internal Revenue Service (IRS) classifies as reasonable and necessary.

When Can I Claim an Adopted Child on my Taxes?
When the adoption has been legally finalized, an adopted kid may be claimed, provided they meet all requirements to be so claimed. The IRS treats a child who has been legally adopted in the same way as a biological child.

How many times can you claim the adoption tax credit?
The credit is a one-time credit per child. You can definitely apply for another adoption tax credit for that child if you adopt again (or children).

Can I Claim Qualified Adoption Expenses for an Adoptee Over the Age of 18?
The IRS is clear that a kid must be under the age of 18 in order to be eligible for qualifying adoption expenses. This age restriction only makes an exception if the adoptee is unable of caring for themselves due to physical or mental impairment.

Can Couples of the Same-Sex claim Qualified Adoption credit?
Yes, expenditures paid by a domestic partner who resides in a state that accepts same-sex parents count as eligible adoption expenses.

Do Special Needs Children Have Different Qualified Adoption Expenses?
The maximum credit amount is often available to taxpayers who adopt a child with special needs in the year the adoption is finalized. The qualifying adoption expenses that were reimbursed in earlier years still count against the maximum amount, and MAGI restrictions still apply.

If I adopted a child from another country, am I still eligible for the credit?
Yes, you are eligible to deduct your qualified adoption expenses, up to the maximum, once the adoption is legally finalized, either in the US or in the country where your kid was born.

Is the adoption tax credit (ATC) a deduction?
No, A deduction is not allowed for the adoption tax credit. The credit equals a dollar-for-dollar decrease in the annual federal tax liability that must be paid.

Can I take the adoption tax credit every year?
No, each child is only eligible for one credit. You can claim the credit in the year of finalization if you adopted in 2012 or later. The credit is then spent in that year, and the balance is carried over to subsequent years until it is completely used up or a total of six years have passed. The one exception is that you must claim expenses for an unfinished US adoption in the year they were incurred. Then, if you conclude the following year and have not already claimed the full amount of the credit, you may claim the remaining amount.

I adopted multiple children, is there a limit to the number of credits I may apply for?
No, you may apply for the adoption tax credit for as many adopted children as you choose (other than a step-child). You will require a second (and maybe third) form 8839 to list each child you adopt if you have more than three.