How Does the Adoption Tax Credit Work?

If you’ve just started looking into adoption, you may have heard of the Federal Adoption Tax Credit. You might be wondering, “How does the adoption tax credit work?” or “Do we qualify for the tax credit?” This credit is an important financing resource that adoptive parents can take advantage of to afford their adoption.
 
The U.S. tax code allows for a tax credit of up to $16,810 per child for adoptions finalized in 2024. You should learn about the IRS’ adoption tax credit before adopting. It can help set your budget when you can anticipate the credit you are entitled to. What follows are some helpful tips to get you started when you file as a new adoptive parent. Here’s what you need to know about the adoption tax credit.
 

Who Qualifies for the Adoption Tax Credit?

You qualify for the tax credit if you paid out-of-pocket expenses relating to your child’s adoption. The amount you are eligible for directly relates to how much you spent the prior year on adoption-related costs. Please keep in mind that the amount of credit you’ll be able to receive depends on your income and federal income tax liability.
 
Through an employer-provided adoption benefits program, your tax preparer can also exclude your income as taxable. You may claim both a credit and an exclusion for the same adoption. However, you can’t claim both for the same expenses.
 
The adoption tax credit covers most types of adoptions. Whether you adopt domestically, internationally, or from foster care, you’re eligible to receive the credit. If you opt for a special needs adoption, you automatically qualify for the maximum allowed credit, no matter what you spent out of pocket for the adoption.
 
Most adoptive parents are eligible for the adoption credit, but some exceptions exist. If your income exceeds $292,150 per year, the credit is not available to you, according to figures provided by the IRS. The credit is also unavailable to individuals who adopt their stepchildren. Additionally, the adoption credit is only eligible for the adoption of minors under 18. Adult adoptions are not eligible.
 
The Adoption Tax Credit will not cover an early pension distribution penalty, self-employment tax, or first-time homebuyer payback.
 
Let’s say that a woman discovers that her granddaughter had her two children taken by the state and placed in foster care. She decides to take steps to adopt her grandchildren formally. This woman makes less than $292,150 annually, making her eligible for an adoption tax credit. For her 2024 adoption, she would be eligible for a tax credit of $33,620 because two children are involved.
 

What Expenses are Covered?

To receive the maximum adoption tax credit, you need to know what kinds of costs qualify you for it. “Qualifying adoption expenses” include any expenses necessary for the adoption. Examples of qualifying adoption expenses include lawyer fees, home study, court fees, medical exams or physicals, agency fees, and any costs directly related to the adoption. In addition, qualifying adoption expenses include those surrounding your travel for the adoption, like meals, plane tickets, lodging, and gas.
 
Keep in mind that eligible fees can be those that are paid for adoption before you even know which child you are going to adopt. For instance, your tax credit may cover the home study or screening process costs. You can claim expenses for an adoption that isn’t yet final the year after you paid them, or you can wait until the adoption is final.
 
The most commonly asked question surrounding “How does the adoption tax credit work?” is whether the assistance for pregnancy-related expenses given to a birth mother is considered a qualified adoption expense under the Adoption Tax Credit. They are not. If you are unsure whether a particular expense would be a “qualified adoption expense,” don’t include it.
 

Which Children Are Considered Special Needs?

When considering “How does the adoption tax credit work?” it is important to note each state has different criteria that qualify a child as “special needs.”
 
A child has special needs for the purpose of the adoption credit if the state determines that the child likely won’t be adoptable without the assistance provided to the adoptive family.
 
The state that legally finalizes the adoption must issue the official Special Needs Declaration. You must submit a signed “Subsidy Agreement” with the state to qualify as a special needs adoption. Some states call this the “Adoption Eligibility Assistance Determination.”
 

Is the Adoption Credit Refundable?

No, the adoption tax credit is not refundable. You cannot receive it as part of a tax refund. However, it is still alive, permanent, and a great credit at $16,810 per child.
 
In addition, you can carry it forward for five years if necessary, so those who pay very little income tax will not see a significant change in their taxes. If you don’t use all the credit in the first year, you can carry it forward for up to five years.
 

When Should We Claim the Adoption Tax Credit?

Some confusion exists about when to claim an adoption tax credit, especially if the adoption process lasted longer than one year. When you claim the credit, you must consider when you actually paid the expenses, what kind of adoption you had (domestic or international), and when the court legally finalized the adoption.
 
“I heard that we can claim the Adoption Tax Credit even if we haven’t adopted yet. Is that true?” ask hopeful adoptive parents Chris and Amy. “We paid the expenses in 2023 and are pursuing domestic adoption. How do we claim adoption expenses when we’re still waiting to be chosen by a birth mother?  We don’t have a social security number or ATIN to include on the forms for a child.”
 
Yes, this is true! Unlike international adoptions and foster care, you can file for the Adoption Tax Credit for multiple years with private domestic adoption.
 
Per the IRS, “The credit amount applies to each adoption of a child, not each calendar year. If you claim expenses in more than one year for the same adoption effort, you must subtract past credit amounts you claimed from your remaining credit…The credit is limited to the amount of tax you owe each year. You may carry unused credit amounts to 5 future years.”
 
If you don’t have an ATIN (Adoption Taxpayer Identification Number) you can complete Form W-7A, Application for Adoption Tax Identification Number for Pending U.S. Adoptions (using these instructions) to receive an ATIN. 
 
Domestic adoption expenses paid before the year the adoption is final are allowable as a credit for the tax year after the year of payment. You can file for the adoption tax credit if you haven’t adopted a child and also if the courts haven’t legally finalized your child’s adoption. For example, if an adoptive couple paid qualified adoption expenses in 2022, 2023, and 2024 and then finalizes their adoption in 2024, they will file for 2022 expenses on their 2023 taxes and the 2023 and 2024 expenses on their 2024 taxes.
 
The IRS has created this handy tool that you can utilize to see whether you’ll be able to claim the Adoption Tax Credit or exclude from income any assistance received for an adoption effort. If your employer provides adoption benefits for qualified expenses, you may not have to include those benefits in your income, so you may not have to pay taxes on them.
 

How Can We Claim an Adoption Tax Credit?

If you want to claim an adoption tax credit, you should complete Form 8839, which is the Qualified Adoption Expenses form. Attach the form to your 1040, 1040-SR, or 1040-NR. If you need further instructions to fill out the form or claim credit, check out the Instructions for Form 8839.
 
The documentation you should keep for the IRS includes:

• A home study or placement agreement completed by an authorized child-placing agency
• The Final Judgment of Adoption
• Adoption Assistance Eligibility Determination (Subsidy Agreement), declaring your child’s special needs, if claiming credit for a child declared special needs
• All documentation of paid qualified expenses

The IRS will only accept the above documents if they’re signed and dated by the proper authorities. Make copies of all original records, proof of payment, and related documents, especially any foreign documents. Store these copies in a secure location, as originals can fade and become unreadable within a few years.
 
You must keep proof of payment for all qualified adoption expenses, beyond just receipts. Acceptable proof includes bank statements, credit card bills, and similar records. Although you only need to provide this documentation to the IRS if requested, it’s essential to store it securely in a clearly labeled file for at least seven years from your filing date. We recommend this in case the IRS audits your returns or the Adoption Tax Credit becomes refundable again.
 
We’re not tax professionals here at Lifetime, and the preceding should not be considered financial advice. If you have more questions about the adoption tax credit, please consult the IRS website for guidance. You might also speak to your accountant or tax professional.
 

Editor’s Note: This article was originally published on February 5, 2020, and has since been updated.