Taxpayers who have adopted or tried to adopt a child may qualify for a tax credit. Here are nine important things about the adoption credit:
- The Credit. The credit is non refundable, which may reduce taxes owed to zero. If the credit exceeds the tax owed, there is no refund of the additional amount. In addition, if an employer helped pay for the adoption through a written qualified adoption assistance program, that amount may reduce any taxes owed.
- Maximum Benefit. The adoption tax credit for 2018 has been increased to $13,840.1
- Credit Carryover. If the credit exceeds the tax owed, taxpayers can carry any unused credit forward. For example, the unused credit in 2016 can reduce taxes for 2017. Use this method for up to five years or until the credit is fully used, whichever comes first.
- Eligible Child. An eligible child is an individual under age 18 or a person who is physically or mentally unable to care for themselves.
- Qualified Expenses. Adoption expenses must be reasonable, necessary and directly related to the adoption of the child. Types of expenses may include adoption fees, court costs, attorney fees and travel. An expense may be a qualified adoption expense even if the expense is paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption effort may treat the fees as qualified adoption expenses.2 Qualified adoption expenses don’t include expenses that a taxpayer pays to adopt the child of the taxpayer’s spouse.3
- Domestic or Foreign Adoptions. Taxpayers can usually claim the credit whether the adoption is domestic or foreign. However, there are different rules regarding the timing of expenses for each type of adoption.
- Special Needs Child. A special rule may apply if the adoption is of an eligible U.S. child with special needs. Under this special rule, taxpayers can claim the tax credit, even if qualified adoption expenses were not paid.
- No Double Benefit. In some instances both the tax credit and the exclusion may be claimed but not for the same expenses.
- Income Limits. Currently, adoptive parents whose incomes are over $247,580 are not eligible for the credit and taxpayers who make over $207,580 (in modified gross adjusted income) per year are subject to phaseouts.4