Adoption Tax Credit Guide

Learn some great tips for claiming your adoption tax credit.

Shelley Skuster February 22, 2018

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.

If you’re interested in domestic infant adoption and would like to speak with an adoption professional about your adoption options, click here.

 

Eligibility
1. Eligibility

Anyone completing the adoption of an eligible child through foster care, domestic adoption, and international adoption are eligible for the adoption tax credit.

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.

When to Claim
2. When to Claim

For any domestic adoption and foster care adoption, qualifying expenses paid before finalization can only be claimed in the tax year following the year of expenditure (i.e. 2014 adoption expenses could not be claimed until the 2015 filed tax return).

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.

Qualifying Expenses
3. Qualifying Expenses

Families should keep receipts for all adoption-related expenses.

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.

Required Documents
4. Required Documents

The type of documentation required to claim the adoption tax credit is based on whether the adoption was finalized or is in the process of being finalized.

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.

Benefit to Taxpayers
5. Benefit to Taxpayers

For 2014 the adoption tax credit amount is up to $13,190 per child adopted.

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.

Employer-provided Benefits
6. Employer-provided Benefits

These are benefits that are provided by your employer that you may be able to exclude from income if your employer has a written qualified adoption assistance program.

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).

State Credits and Subsidies
7. State Credits and Subsidies

Many states offer a tax credit or subsidy in addition to the federal tax credit.

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.

Children with Special Needs
9. Children with Special Needs

If a child is declared as having special needs according to state criteria, the adoptive parents may qualify for the full amount of the adoption tax credit with no expenses necessary.

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.”

Quick Tips
10. Quick Tips

Keep all adoption-related documentation in one envelope in the event the IRS requests it.

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.

Contributors to this Guide:
12. Contributors to this Guide:

Dave Lemaster / Dave@ChristianAdoptionConsultants.com
Adoption Advocate and Tax Professional
Christian Adoption Consultants

Becky Wilmoth / Becky@BillsTax2.com
Adoption Tax Credit Specialist
Bills Tax Service

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Shelley Skuster

Shelley is a former award-winning television journalist who traded in suit coats and red lipstick for a messy bun and yoga pants. She's a freelance writer who stays at home with her three daughters who are all ((gasp)) under the age of three and came to her via adoption and birth. She's the woman behind the blog Shelley Writes, and she can also be found on Facebook and Twitter.


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