When a family adopts, they are allowed to claim a tax credit on their income tax return for expenses incurred throughout the adoption process.
Most families will claim the adoption tax credit when the adoption is finalized, but there are also opportunities to claim expenses before finalization.
The adoption tax credit is complex, and it’s recommended that individuals seek professional tax help when looking to claim the tax credit to ensure it’s handled properly.
Additionally, those who attempted foster care or domestic adoption, but the adoption was never completed are eligible to claim the credit for expenses incurred.
Note: People are not allowed to claim the adoption tax credit for adopting a spouse’s child (stepchild). A family’s income can become a factor in their eligibility for the tax credit as well. When a family’s income exceeds $197,880, the credit amount is reduced. The adoption tax credit is completely gone if income is $237,880 or more. Expenses incurred for a failed international adoption cannot be claimed for the adoption tax credit.
For domestic adoptions, a family can claim the expenses the following year they paid the expenses, however, it is easier if the family waits until the adoption is finalized because they will have a Social Security number for their child.
In the event a family wishes to the file for the adoption tax credit but their child does not have a Social Security number, they should request an Adoption Taxpayer Identification Number (ATIN) through the Internal Revenue Service (IRS).
When the adoption has been finalized, any remaining expenses not already claimed can be claimed.
For an international adoption, expenses cannot be claimed until the year of finalization. If there are expenses a year after finalization and a family still has adoption tax credit available, the family can claim them on the tax return for the year paid.
This includes keeping a record of adoption agency fees, attorney fees, court costs, travel expenses; including meals and lodging while away from home—and re-adoption expenses related to the adoption of a foreign child.
If the family is claiming the adoption tax credit when the adoption is finalized, the adoption certificate or decree of adoption from the court is needed.
If the adoption is not finalized, a home study, placement agreement, or court document is needed.
This does not mean a family will receive the full amount in the year of a finalization.
Those eligible to claim the adoption tax credit can only benefit in a given year up to the amount of their tax liability (for 2014 look at form 1040, page 2, line 44).
The benefit is limited because it is a non-refundable credit. This means it cannot exceed a family’s tax liability for the year.
Other credits that are claimed will impact the claimable amount as well.
Any unused adoption tax credit can be carried over to the next year to offset that year’s tax liability.
The credit can be carried over for up to five years, at which time any unused amount expires.
A qualified adoption assistance program is a separate written plan set up by an employer to provide adoption assistance to its employees.
Employer-provided adoption benefits should be shown in box 12 of your Form(s) W-2 with code T.
These benefits can be claimed in addition to claiming the adoption tax credit, as long as they are not for the same expenses.
For example, if someone pays qualified adoption expenses of $25,000 and their employer provides $10,000 in qualified adoption benefits, that means $10,000 will be excluded from their income and $15,000 is still eligible for claiming the adoption tax credit (capped to the yearly credit max, $13,190 for 2014).
For example, Wisconsin doesn’t have a credit, but they do have a $5,000 subtraction on the WI tax return a family can take for adoption-related expenses.
There is often an added benefit program for those who adopt children classified as “special needs” (often considered correctable). Sometimes these subsidies can apply to international children.
Ask your home study social worker for information about possible state credits.
Each state has a different criteria as to what qualifies as special needs.
For the IRS, a child’s declaration of special needs means “difficult to place for adoption.”
The Form 8839 for qualified adoption expenses can now be e-filed, so filing for the adoption tax credit may be easier for some families.
For adoption-related expenses, copy all of your receipts as soon as possible because receipts often fade, particularly receipts from another country.
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AUTHOR / Shelley Skuster
Shelley is a former award-winning television journalist who snagged a gig in PR after becoming a mom. She's the writer behind This Family's Journey, an honest blog about surviving infertility and the privilege of being an adoptive mom. Shelley is a well-known adoption advocate in Iowa who enjoys spending time with family and friends, a strong cup of coffee and the occasional happy hour. Follow her on Twitter, Pinterest and Facebook!