Adoption Tax Credit

Parents looking at their taxes who finalized an adoption last year may claim an adoption tax credit
Below you will find information on the adoption tax credit. This information is provided as a general guideline and is not intended as legal advice nor should such information be relied on without consulting your tax advisor or adoption attorney regarding your particular facts and circumstances.

Parents who finalized an adoption last year may claim a maximum credit of $14,400 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 include necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the adoption. 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. What are the Adoption Tax Credit (ATC) and Exclusion?

The ATC is a tax credit for 100 percent of “qualifying adoption expenses” (discussed below) up to a maximum amount of $14,400. A tax credit reduces your tax liability dollar for dollar and thus 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. As with the ATC, this amount is limited to a maximum exclusion of $14,400. 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. 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. 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 the Exclusion?

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. 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.

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 if your modified AGI is greater than $214,520.

Note that married couples must file a joint tax return to take the ATC or exclusion. The income limits in the table below apply equally to income reported on the joint return of a married couple as well as income reported on an individual tax return.

If Your Modified AGI Is

Then You Will Be Eligible For

$214,520 or less
The full credit or exclusion
$214,521 to $254,520
A reduced credit or exclusion
$254,520 or more
No credit or exclusion

 

3. What are “Qualifying Adoption Expenses”?

Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and 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. For a foreign adoptee to be considered an eligible child, he or she must be under 18 years old.

It is important to note that as with other credits and exclusions in the tax law, the IRS will be looking to prevent taxpayers from abusing the ATC and exclusion by fraudulently claiming expenses that did not exist or by “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 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. When can you take the Adoption Tax Credit 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 foreign child, you cannot take the adoption credit 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
If you pay qualifying expenses in
Then take the credit in
Any year before the year the adoption becomes final
The year after the year of the payment
The year the adoption becomes final
The year the adoption becomes final
Any year after the year the adoption becomes final
The year of the payment

If your employer pays for qualifying expenses under an adoption assistance program in

Then take the exclusion in

Any year
The year of the payment

 

Adoption of a Child who is not a U.S. Citizen or Resident
If you pay qualifying expenses in
Then take the credit in
Any year before the year the adoption becomes final
The year the adoption becomes final

The year the adoption becomes final

The year the adoption becomes final
Any year after the year the adoption becomes final
The year of the payment
If your employer pays for qualifying expenses under an adoption assistance program in
Then take the exclusion in
Any year before the year the adoption becomes final
The year the adoption becomes final
The year the adoption becomes final
The year the adoption becomes final
Any year after the year the adoption becomes final
The year of the payment

 

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.

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. For example, assume that your tax liability is $4,000 but you have $7,000 in adoption expenses. You can claim a $4,000 credit for the tax year and carry forward the remaining $3,000 of credit to offset tax liability for the next 5 tax years, if necessary.

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. As noted above, if you are married, you must file a joint return to take the adoption credit or exclusion.

You must provide an identifying number for the child on Form 8839. For this, you must 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 an adoption taxpayer identification number (ATIN) if you are adopting a U.S. citizen or resident and cannot obtain a social security number prior to filing your tax return. 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 a foreign adoptee.

The amount of your adoption credit or exclusion is limited to $14,400 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. The $14,400 amount is the total amount of qualifying expenses you may take into account whether, for example, your adoption takes 1 year or 4 years. That is, the $14,400 credit must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort. For example, assume that in your effort to adopt a child, your qualifying adoption expenses are $3,000. The maximum amount of expenses you can take into account for future years will be reduced by the expenses you took into account. Therefore, the maximum amount of expenses you could take into account for future years with respect to this adoption effort is $7,000.

Assume now that you pay $6,000 of qualifying adoption expenses in an effort to adopt an eligible child. However, the adoption is not successful. You then pay an additional $7,000 of qualifying adoption expenses for the successful adoption of a different eligible child. With respect to the dollar limit on the credit, the IRS views the $13,000 of expenses as paid in one adoption effort. Therefore, because the maximum amount of expenses you can take into account is $10,000, you would not be able to take the ATC for $3,000 of qualifying adoption expenses.

6. Special 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. What documentation should be kept?

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. For Additional Information

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 web site, or by calling the IRS at 1-800-829-1040.

© by John J. Spina, Esq.

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Parents who finalized an adoption last year may claim a tax credit

This information is provided as a general guideline on the new tax benefits available in connection with the adoption of a child. This discussion is not intended as legal advice nor should such information be relied on without consulting your tax advisor or adoption attorney regarding your particular facts and circumstances.

Parents who finalized an adoption last year may claim a maximum credit of $13,460 for adoption expenses on their federal income tax returns. The tax credit phases out for taxpayers with high modified adjusted gross incomes. Sadly, it may expire. Proposals to make that benefit permanent have received much legislative support.

Qualifying expenses include necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the adoption. 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.

I. What are the ATC and Exclusion?

The ATC is a tax credit for 100 percent of “qualifying adoption expenses” (discussed below) up to a maximum amount of $13,460. A tax credit reduces your tax liability dollar for dollar and thus 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. As with the ATC, this amount is limited to a maximum exclusion of $13,460. 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. 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. 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 ATC and the Exclusion?

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. 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.

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 if your modified AGI is greater than $150,000.

Note that married couples must file a joint tax return to take the ATC or exclusion. The income limits in the table below apply equally to income reported on the joint return of a married couple as well as income reported on an individual tax return.

If Your Modified AGI Is

Then You Will Be Eligible For

$150,000 or less
The full credit or exclusion
$150,001 to $189,999
A reduced credit or exclusion
$190,000 or more
No credit or exclusion

 

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