Adoption Tax Credit (Encyclopedia)

Financing an adoption can be one of the major stresses in the adoption process. One thing to take into consideration when working with costs involved in adoption is the possibility of being able to receive help from the Internal Revenue Service by the way of the Adoption Tax Credit. The adoption tax credit allows directly related adoption expenses to the subtracted on a dollar for dollar basis against your yearly tax liability.

A qualified adoptive parent may be able to take advantage of the Adoption Tax Credit if they meet certain requirements. The two requirements that must be met in order to be eligible for the credit are: To complete the adoption of an eligible child and to pay the eligible adoption expenses out of pocket.

The first of the requirements is to complete the adoption of an eligible child. What is an eligible child? An eligible child is one who was adopted at age 17 or younger or a child of any age who is a US citizen or resident alien and is physically or mentally disabled and unable to care for them self.

What is considered an eligible adoption expenses? Eligible adoption expenses include all the direct expenses related to the adoption minus any amounts reimbursed to you or paid for by an employer through adoption assistance, a government agency or any other organization. These expenses are typically made up of agency fees, court fees, legal fees, travel fees, and any other fee directly associated with the adoption of an eligible child.

Adoptive parents are allowed to file for the adoption tax credit in the year that their adoption was finalized. If you are unable to use the entire adoption tax credit in the first year, it is allowed to carry the remaining balance forward for up to an additional five years.

The adoption tax credit may be claimed in full by those adoptive parents who have adopted one or more special needs children regardless of the expenses that were incurred for the adoption. The credit may be claimed in full the year that the adoption becomes final.

For an international adoption, the adoption is considered final the year that the baby arrives in the United States as long as they have come home on an IR-3 visa. For those children who have come home on an IR-4 visa in which a re-adoption must occur, the year the re-adoption is finalized is the year you may claim the adoption tax credit.

The adoption tax credit may not, however, work for everyone. The credit is based on your adjusted income for the year in which you finalized your adoption. The Instructions for IRS Form 8839 has guidelines that will help you figure out your gross income in relation what you can claim for the expenses of your adoption.