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.
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
These adoption tax benefits are subject to income limits. Income eligibility is based on modified adjusted gross income (MAGI). For 2022,
For each adoption effort, you can claim up to $14,890 in eligible expenses as a credit as well as $14,890 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.
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.
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.[2]
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 the 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.[3] (See IRS Tax Topic 607 for more information on the definition of “special needs” in this context.)
When you are entitled to claim adoption expenses depends upon
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.
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 Tax & Financial Planning 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.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.
[1] "Topic 607 - Adoption Credit and Adoption Assistance Programs." IRS.gov. Internal Revenue Service, 5 Feb 2016. Web. 22 Feb 2016.
[2] "Top Ten Facts about Adoption Tax Benefits." IRS.gov. Internal Revenue Service, 10 March 2015. Web. 22 Feb 2016.
[3] "Claiming the Federal Adoption Tax Credit for 2015." Nacac.org. North American Council on Adopted Children. n.p., Jan 2015. Web. 22 Feb 2016.