Adoption Tax Credit

Parents who finalized an adoption last year may claim a credit for adoption expenses on their federal income tax returns. The tax credit phases out for taxpayers with high modified adjusted gross incomes.

Qualifying expenses for the adoption tax credit 2024 include necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the adoption. To begin, adoptive parents who plan to claim the credit should file Form 8839, titled Qualified Adoption Expenses, and attach it to Form 1040. For more information and other downloads to required forms, please visit the IRS website by clicking here.

1. The Adoption Tax Credit (ATC) and Exclusion Explained

ATC is a tax credit for 100 percent of “qualifying adoption expenses” (discussed below) up to a maximum amount. Ultimately, a tax credit reduces your tax liability dollar for dollar. Thus it is much more valuable than a tax deduction which only reduces the amount of income on which you have to pay tax.

In addition to the ATC, if your employer has implemented an adoption assistance program, you may be able to exclude from gross income the employer’s payments or reimbursements for your expenses in adopting a child. However, as with the ATC, this amount is limited to a maximum exclusion. Amounts your employer pays for your adoption expenses are considered income paid to you by the employer (like salary) on which you otherwise would have to pay tax. Additionally, the exclusion allows you to reduce your income by the amount of the employer payments or reimbursements.

An adoption assistance program is a written plan of the employer that must meet certain federal tax law requirements. For information on these requirements, consult IRS Publication 968 or your tax advisor. Additionally, you cannot exclude employer payments or reimbursements for adoption expenses that you incurred before the employer’s adoption assistance program was in effect.

You may claim both the ATC and the exclusion for the same adoption, but not for the same expense.

2. Who Qualifies for the Adoption Tax Credit and Exclusions?

The ATC and exclusion are available for persons in the process of adopting a child, persons who have adopted a child or who are considering adopting a child. Also, there are income limitations that phase out the ATC and exclusion for higher income earners; however, the dollar amounts have been significantly increased under the new law.

Start with the IRS Form 8839 and the accompanying instructions will tell you how to figure your modified AGI for the purpose of the credit and exclusion and will provide the amount by which you would have to reduce your credit or exclusion.

Note that married couples must file a joint tax return to take the ATC or exclusion. Also not, the income limits in the table below apply equally to income reported married couples as well as individual tax returns.

3. What are the Qualifying Adoption Expenses?

Expenses that qualify are reasonable and necessary adoption fees, court costs, attorney fees, and traveling expenses (including meals and lodging). Also other expenses directly related to, and whose principal purpose is for, the legal adoption of an “eligible child.” An eligible child is under 18 years old or physically or mentally incapable of caring for himself or herself. Additionally, for a foreign adoptee to be considered an eligible child, he or she must be under 18 years old.

What the IRS is Looking For

Also, it is important to note that the IRS will be looking to prevent taxpayers from abusing the ATC and exclusion. Therefore they will check for fraudulent expenses that did not exist or “padding” actual expenses. Thus, when the tax law provides that qualifying adoption expenses must be “reasonable and necessary,” and “directly related to, and whose principal purpose is for” a legal adoption, these are legal standards by which the IRS will review your tax return and determine whether your claim for the ATC or exclusion is valid. For example, the expense for chartering a private jet to take you overseas to meet your adopted child probably is not a reasonable expense for which you could claim the credit or exclusion. In addition, such a claim would likely serve as a “red flag” to the IRS and may prompt an audit of your tax return. Thus, as you incur adoption expenses, you should keep in mind the legal standard when determining what is a qualifying adoption expense.

Non-Qualifying Expenses

Expenses that don’t qualify include, among other things, expenses that violate state or federal law, expenses for the adoption of your spouse’s child, expenses paid using funds received from any federal, state, or local program, expenses allowed as a credit or deduction under any other federal income tax rule, or expenses paid or reimbursed by your employer (except for amounts paid or reimbursed under an adoption assistance program).

4. How U.S. Citizenship Affects Adoption Tax Credit 2024 and/or Exclusion

There are important differences regarding if and when you could claim the ATC or exclusion depending on whether the eligible child is a U.S. citizen or resident. If the eligible child is a U.S. citizen or resident, you can claim the credit or exclusion even if the adoption is never finalized. However, if you are adopting a child from another country, you cannot take the adoption tax credit 2024 or exclusion unless and until the adoption becomes final. You may claim the credit and/or exclusion as shown in the following tables.

Adoption of a Child who is a U.S. Citizen or Resident

Adoption of a Child who is NOT a U.S. Citizen or Resident

If your employer makes adoption assistance payments in a year before the adoption of a foreign child becomes final, you must make an adjustment on your tax return for the earlier year to include the payments in your income. Then, on your return for the year the adoption becomes final, you may make an adjustment to take the exclusion.

Also, if your tax liability is less than your available credit, you may carry forward the amount of credit left over, until it is used, for a period of 5 years. You can also apply the credit to offset any taxes owed under the alternative minimum tax.

5. How to take the Adoption Tax Credit or Exclusion

You must file IRS Form 8839 with either IRS Form 1040 or Form 1040A to take the credit or exclusion. Also, as noted above, if you are married, you must file a joint return to take the adoption credit or exclusion.

Additionally, you need to provide an identifying number for the child on Form 8839. For example, you can use either a social security number if the child has one or if you will be able to obtain one prior to filing your tax return. Or if you are adopting a U.S. citizen or resident and cannot obtain a social security number prior to filing your tax return, you can use an adoption taxpayer identification number (ATIN) . Moreover, you must use an individual taxpayer identification number (ITIN) if the child is a resident or nonresident alien and not eligible for a social security number. An ATIN is not available for an adoptee from another country.

Determining the Amount of Your Credit

The amount of your exclusion or adoption tax credit 2024 is limited for each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar limit applies separately to each.

For even more explanation and some helpful examples, please refer to the IRS website on the topic of adoption credit and assistance.

6. Rules for Adopting a Child with Special Needs

For children with “special needs,” the credit or exclusion will be allowed regardless of whether you have qualifying adoption expenses.

A child qualifies as a special needs child if he or she is (1) otherwise an “eligible child” (as defined above), (2) a U.S. citizen or resident, and (3) a state determines that the child cannot or should not be returned to his or her home and probably would not be adopted unless adoption assistance is provided to the adoptive parents.

You should consult your tax advisor, adoption attorney, and relevant state agency regarding adoptions of children with special needs.

7. Documentation You Will Need to Keep

As noted above, the IRS will likely review a tax return claiming the ATC or exclusion with the same careful attention it reviews tax returns claiming other tax credits and exclusions. Therefore, it is important that you retain all of your receipts and records showing payments made in connection with adoption expenses incurred. You should also keep copies of your tax returns that you file each year.

8. Webinar and Additional Information

In the Adoption Tax Credit webinar, we covered important questions about this tax credit such as:

• The difference between a tax credit and a refund.
• How will the Adoption Tax Credit be valuable for us?
• What type of adoption expenses can we claim, and what records are needed when we file our taxes?
• When can we claim this tax credit?
• If we adopt more than one child in the same year, or incur failed adoption expenses, what do we do?
• The deadline to claim this tax credit
• Is there a time limit on the expenses we can claim?
• …And more!

If you’re having trouble understanding the Adoption Tax Credit and how it’ll apply to your adoption, this webinar is a must-watch! Please note, we’re presenting this information as adoption professionals to help you gather questions and knowledge about the tax credit, not as tax professionals. We recommend that you ask a qualified tax preparer for specific answers about how the Adoption Tax Credit 2024 will apply in your unique circumstances. You can watch “Lifetime’s Webinar: Understanding the Adoption Tax Credit” right now, at AdoptionWebinar.com

For additional information on the ATC and income exclusion under an employer-sponsored adoption assistance program, you should consult your tax advisor or adoption attorney. You may also consult IRS Publication 968 which provides a fairly clear explanation of the ATC and exclusion as understood by the agency that will be reviewing your tax return and enforcing the requirements of these tax provisions. Additional information may also be found on the IRS website, or by calling the IRS at 1-800-829-1040.

© by John J. Spina, Esq.