Adopting a child can be a long journey with financial implications. This year, the U.S. government offers an adoption tax credit of up to $15,950 in 2023 increasing to $16,810 in 2024 to assist adoptive parents with the costs associated with the adoption process.
How does the tax credit work? A credit is better than a deduction, it is a straight refund of qualified adoption expenses up to the annual tax credit in expenses. So, if you have $3000 in taxes for a year, and had over $3000 in adoption expenses, you will get a $3000 refund and the balance as a credit carrying over for a subsequent year.
Qualified adoption expenses
The first thing to do is determine your qualified adoption expenses, as defined in Section 23(d)(1) of the Internal Revenue Code, which consist of costs you have paid that are directly associated with the adoption process. Here's a breakdown of what qualifies:
● Reasonable and necessary adoption fees: This includes fees paid to adoption agencies or professionals facilitating the adoption.
● Court costs and attorney fees: Legal expenses incurred during the adoption proceedings are considered qualified adoption expenses.
● Travel expenses: This covers the costs of travel, including meals and lodging, while away from home for adoption-related purposes.
● Other directly related expenses: Any additional costs essential for the adoption process fall into this category, such as reasonable birth mother expenses, medical care for the child, etc.
In domestic adoptions, these expenses are considered qualified even if paid before identifying an eligible child. Eligible children are those under 18 years old or incapable of self-care. However, expenses related to adopting a spouse's child are not considered qualified adoption expenses, therefore all stepparent and adoptions are not eligible for any adoption credit. In a special case, if registered domestic partners reside in a state allowing second-parent adoptions, expenses incurred by one partner for adopting the other's child may qualify.
Income and dollar limitations
The tax credit for adoption does have some limitations, including income-based criteria and dollar thresholds. For the tax year 2023, the phaseout range for Modified Adjusted Gross Income (MAGI) is between $239,230 and $279,230, which means if you make between this amount, you will not be able to claim the full adoption tax credit, and at or above $279,230, there is no adoption credit. This applies to those whose status is single, head of household, qualifying surviving spouse, or married filing jointly. Generally, if you are married, you must file a joint return to take the credit or exclusion. However, if you are married and aren't filing jointly because you are separated from your spouse, you may be able to take the credit or exclusion on your own return, but you must meet certain requirements set by the IRS.
Additionally, the maximum allowable adoption expenses each year are influenced by previous claims made for the same adoption effort and expenses incurred during unsuccessful adoption attempts.
In which tax year can you claim the credit?
The timing for claiming the adoption credit depends on when expenses were paid, the type of adoption (domestic or foreign), and when the adoption was finalized. Expenses paid before the adoption is finalized can be claimed on the tax return for the following year for domestic adoptions, while for foreign adoptions, expenses paid before and during the year of finalization can be claimed on the tax return for that year. Once the adoption is finalized, expenses paid during or after that year can be claimed on the tax return for the year they were paid, regardless of whether it's a domestic or foreign adoption.
This means that expenses paid in previous years may be eligible for the current year's tax return. For example, if an adoption became final in 2023, expenses from previous years leading up to the finalization can be claimed on the 2023 tax return.
Special Needs Adoptions
Adopting a U.S. child identified as having special needs may qualify you for the maximum adoption credit. However, this maximum amount may be reduced if you've claimed adoption expenses for the same child in previous years, and income limits may apply. Additionally, even if you or your employer didn't pay any adoption expenses, you may still qualify for an exclusion if your employer has a written qualified adoption assistance program. A child is considered to have special needs if they are a U.S. citizen or resident when the adoption process begins, the state determines they can't or shouldn't return to their parents' home, and the state believes they likely won't be adopted without assistance.
Filing Considerations
Your filing status affects your eligibility for claiming the adoption credit or exclusion. If you filed your taxes as "married filing separately" in the year you first qualify for adoption expenses, you generally can't claim the credit or exclusion for those expenses. You may need to amend your return to change your filing status if you meet certain requirements. To claim the adoption credit or exclusion, complete Form 8839 and attach it to your tax return. You no longer need to include adoption documentation with your return, but you must keep it for your records. The IRS encourages e-filing, and Form 8839 can be e-filed with your tax return, eliminating the need to mail completed forms.
This article is for informational purposes only. It does not constitute legal or tax advice. Talk with your tax professional if you need help with seeking an adoption tax credit. If you have an adoption in California, our legal team is ready to help you. We even offer the benefit of Your Adoption Finance Coach to those pursuing an independent adoption and need help with fundraising, grants, or budgeting for their adoption. Reach out to us now.