If you recently adopted a child or are currently in the process, you may be able to claim tax benefits for the costs associated with your adoption efforts. Here are the basics on how to qualify and what costs you may be able to claim.
Credit and Exclusion
Tax benefits associated with adoption include a credit for qualified expenses paid as well as an exclusion from taxable income for qualified adoption expenses paid on your behalf by your employer. Qualified expenses include
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Travel expenses, including food and lodging, and
- Other reasonable expenses directly related to the legal adoption of an eligible child (defined as “an individual who is under the age of 18, or is physically or mentally incapable of self-care.”)
Income and Dollar Limits
These adoption tax benefits are subject to income limits. Income eligibility is based on modified adjusted gross income (MAGI). For 2015,
- Those with MAGI below $201,010 can claim the full amount.
- Those whose MAGI falls between $201,010 and $241,010 can claim a reduced amount, and
- Those with income above $241,010 are not eligible.
For each adoption effort, you can claim up to $13,400 in eligible expenses as a credit as well as $13,400 in expenses that your employer paid on your behalf as an exclusion. However, you may not claim both a credit and exclusion for the same expenses. For example,
Your adoption expenses for the tax year totaled $15,000, of which your employer paid $5,000. You may exclude $5,000 from your taxable income but take a credit for only the $10,000 that you paid.
This dollar limit applies to a single adoption effort. That means expenses paid for an unsuccessful attempt at adoption will be combined with those paid for a subsequent adoption attempt for the purpose of calculating the credit and exclusion.
Nonrefundable Credit and Carryover
The adoption tax credit is a nonrefundable credit, meaning that it is limited to the amount of your tax liability. For example,
Your eligible adoption expenses for the tax year totaled $13,000. Your total tax liability was $5,000. You may only receive $5,000 in refundable tax credits for the year, so $8,000 of your expenses won’t count toward your credit for the year.
However, in the event that your credit exceeds your tax liability for the year, you may carry the difference forward for up to five subsequent years until you have claimed the entire credit.
- In the above example, you claim only the $5,000 in adoption expenses that you will be able to receive as a tax credit in the first year.
- The following year, your tax liability is $4,000, and you claim another $4,000 of your adoption tax credit (for a total of $9,000).
- The third year, your tax liability remains $4,000. You may claim your remaining $4,000 in expenses for the rest of your tax credit.
Adoption of Special Needs Children
A special rule allows adoptive parents of (narrowly-defined) “special needs” children to claim a tax credit regardless of whether they actually had to pay adoption expenses. Bear in mind that “special needs” for the purpose of this provision is not directly related to disability; rather, it is based on a determination by the state’s child welfare agency that a particular child would be difficult to place with adoptive parents. (See IRS Tax Topic 607 for more information on the definition of “special needs” in this context.)
When to Claim
When you are entitled to claim adoption expenses depends upon
- When the expenses are paid,
- Whether it’s a domestic or foreign adoption, and
- When the adoption is finalized.
In domestic adoptions, costs paid before the year the adoption is finalized can be claimed for the year following that in which they are paid (even if the adoption is never finalized).
In foreign adoptions, all eligible expenses paid to date can be claimed for the year in which the adoption becomes final.
In both cases, costs paid during or after the year the adoption is finalized can be claimed for the year in which they are paid.
How to Claim
To claim the adoption tax credit and/or exclusion, complete Form 8839, and include it with your tax return. Be sure to keep all documentation of your adoption for your records.
Boelman Shaw provides quality tax and financial planning services in Des Moines. We can help ensure you claim all of your credits, exclusions, and deductions properly as well as create a strategy to maximize your tax advantages in the long term.
Boelman Shaw provides tax advice. Registered Representatives, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representatives, RDA Financial Network, a Registered Investment Advisor. Cambridge Investment Research, Inc., RDA Financial Network, and Boelman Shaw are not affiliated. CIR165437
 "Topic 607 - Adoption Credit and Adoption Assistance Programs." IRS.gov. Internal Revenue Service, 5 Feb 2016. Web. 22 Feb 2016.
 "Claiming the Federal Adoption Tax Credit for 2015." Nacac.org. North American Council on Adopted Children. n.p., Jan 2015. Web. 22 Feb 2016.