For any parents who are looking to adopt, the adoption tax credit is an important and sometimes necessary part of the adoption process. The adoption tax credit helps adoptive families across the country by greatly limiting the financial burdens of adoption. However, there are some aspects of the adoption tax credit that are tricky to figure out.
Here are some important things to consider when using this Adoption Tax Credit:
- Tax Credit Vs ExclusionThe credit is the most commonly used tax break for adoptions. You have the choice of accepting either a tax credit or exclusion if your employer contributes to funding the adoption, in which the amount may be excluded from tax.
- Maximum BenefitsThe maximum adoption credit and exclusion for 2020 is $14,300 per child. This credit will be reduced for families with modified adjusted gross incomes of $214,520 and over. You are not eligible for the tax credit if your modified adjusted gross income is $254,520 or more for the year.
- Credit is Non-RefundableAlthough the adoption credit can be used to lower your tax to zero, you cannot claim a refund beyond your tax liability.
- Credit Carries ForwardThe tax credit will be available to adoptive parents for six years. As soon as they are eligible to claim the credit, they have five additional years to make the claim. It’s a one-time credit per child.
- How to Claim the Tax CreditAdoptive parents should use Form 8839 included with Form 1040 to claim the credit.
- No Limit to the Number of CreditsAdoption credit can be claimed for any number of adopted children aside from stepchildren. However, if you have over three adopted children, you will need Form 8839 for each child.
- Credit for a Failed AdoptionYou may still claim the credit for a non-finalized adoption if it was in the United States and you had qualified adoption expenses, but you’ll have to wait a year after running up the expenses. Keep in mind that if you claim for a failed adoption, then you can’t claim on the next successful adoption.
- Some Expenses QualifyAdoption expenses must be directly related to and necessary for the adoption of the child. Some examples include court costs, travel, and attorney fees. Amounts that are reimbursed by a government entity don’t qualify.
- If the Child Is Born in Another CountryYou can claim adoption expenses either in the child’s native country or in the United States after the adoption is legally finalized.
Please note that we are adoption professionals and can discuss our program, but any specific information about the tax credit (like whether or not you qualify) should be directed to a tax attorney or accountant.