How to Use the Adoption Tax Credit

The U.S. Adoption Tax Credit can help offset the costs of adoption, expenses associated with a failed domestic adoption, or the financial obligations of caring for a qualifying special needs child.

There is no doubt, adoption can be costly. Agency fees, attorney fees, court costs, and travel expenses can add up quickly. Fortunately, a tax benefit is available for qualifying adoptions. You may even be eligible for the credit if you adopted a child out of the foster care system but did not incur out-of-pocket expenses.

Credit Available

The maximum tax credit for 2015 is $13,400 per child for households with an adjusted gross income of $201,010 or less.

Eligible Adoptions

• Finalized foreign and domestic adoptions
• Costs incurred from failed domestic adoptions
• Special needs* adoptions that meet the following criteria: The child is a United States citizen, the child’s biological parents’ rights have been terminated, the child is unlikely to be adopted without the assistance provided to the adoptive family.
• Adoptions of individuals over the age of 18 who cannot physically or mentally care for themselves

*Tax credit eligible “special needs adoptions” are adoptions of children that have been deemed “difficult to place” by the state and not necessarily children with physical/mental disabilities, including individual children over the age of 3 and sibling groups. These children typically receive an adoption subsidy or adoption assistance program benefits until the age of 18.

Ineligible Adoptions

• Stepchild adoptions
• Adult adoptions
• Foreign failed adoptions
• Adoptions into households with an adjusted gross income of $241,010 or higher*

*Households with an AGI between $201,010 and $241,010 are eligible for a partial credit

Qualifying Expenses*

• Adoption and agency fees
• Court and attorney costs
• Travel expenses
• Other expenditures as a direct result of a legal adoption

*Households with a qualifying special needs adoption can receive the tax credit without any out-of-pocket expenses. All other adoptions must document qualifying expenses and keep them on file.

When to Claim

• Domestic Adoptions (including failed adoptions): The year of finalization or one year after costs were incurred
• Qualifying Special Needs Adoptions: The year of finalization
• Foreign Adoptions: The year of finalization

Credit Carryover

The adoption tax credit is nonrefundable. This means if your tax owed is less than your credit, you can claim any unused portion of the credit for up to five years or until you use the full credit.

How to File

Info straight from the IRS website (irs.gov):

To claim the adoption credit or exclusion, complete Form 8839 (PDF), Qualified Adoption Expenses, and attach the form to your Form 1040 (PDF), U.S. Individual Income Tax Return, or Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return. The Form 8839 Instructions (PDF) contain additional information about the adoption credit and exclusion.

Records

The IRS no longer requires the filing of supporting documents (receipts) to claim the tax credit, but keep those records in a safe place! While approximately 1% of all tax returns are audited annually, up to 70% of households that claimed the adoption tax credit was at least partially audited in past years.

Resources

https://www.irs.gov/taxtopics/tc607.html
https://www.irs.gov/uac/Top-Ten-Facts-about-Adoption-Tax-Benefits
https://www.nacac.org/taxcredit/taxcredit2015.html