July 23rd, 2019
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How Does The Adoption Tax Credit Work?

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How Does The Adoption Tax Credit Work?

UPDATED 1/26/18: This article has been updated with the 2018 tax credit numbers.

What Is The Adoption Tax Credit?
For parents who want to adopt, all the costs associated with adoption can add up. However, there is great news for adoptive parents! The adoption tax credit, made permanent in 2013, is a nonrefundable tax credit which encourages parents to adopt by making the adoption process more affordable. For the 2018 adoption tax credit, adoptive families could claim up to $13,840 of qualified adoption expenses.

The adoption tax credit is a nonrefundable tax credit, which means people that owe taxes are qualified to apply for the adoption tax credit. Since this is nonrefundable, remember that if the adoptive parent’s liability is less than the maximum credit available, then the parent could only claim up to how much they owe in taxes. For example, if the parent’s liability is $10,000 and credit is up to $13,840, then the parent can only claim the $10,000 tax credit. However, the remaining credit of $3,840 can be carried forward for the next 5 years.

Every year, the maximum amount for the adoption tax credit will likely continue to grow. Adoptive parents should also keep in mind that the credit available is per child, even for twins. Another thing to keep in mind, is that you can claim the tax credit for a failed adoption, but you can’t claim it again for a successful adoption later on.

What Are The Requirements for The Adoption Tax Credit?
Beyond passing the homestudy and any additional requirements from your adoption program, there are a few requirements for the federal adoption tax credit. The adoptive parent must be 18 years or older and must be in a stable mental condition to take care of his or herself. In addition, adoptive parents who adopt a child with special needs can claim the maximum credit regardless of whether or not the adoptive parent paid for qualified expenses.

Adoption Tax Credit

When Can I Claim the Adoption Tax Credit?
You claim the tax credit when filing taxes in the year after you incur the adoption expenses. This means that if you incur the expenses in 2017, then you apply for the credit when filling out your 2018 taxes. However, for international adoptions, the adoption needs to be finalized before you can claim the tax credit. For domestic private adoptions, the credit can be claimed before finalization.

What Are The Income Restrictions for The Adoption Tax Credit?
If an adoptive family makes equal to or less than $207,580 annually, then they are qualified for the full tax credit. If the family makes between$207,580 and $247,580 annually, then they are subject to a reduced tax credit. However, if the family makes more than $247,580, then they will not be eligible for the adoption tax credit.

What Are Considered Qualified Adoption Expenses?
To be considered qualified for the adoption tax credit, the adoption expenses you pay should be directly related to the child’s adoption expenses and are reasonable and necessary. The qualified adoption expenses are: adoption fees, attorney fees, court costs, and travel expenses (which include meals and housing).

Adoption expenses that are not considered to be qualified are daycare costs, stroller, formula, and everything unrelated to the adoption process costs.

Once you’ve calculated the qualified expenses, you will need to report that amount in Form 8839 in order to claim the adoption credit.

What Forms Should I Submit to Qualify For The Adoption Tax Credit?
Once you’ve finished filling out the Form 8839 for Qualified Adoption Expenses, you should attach this to your Form 1040 or Form 1040A. If you are married, you would have to file a joint return to claim the tax credit. However, if you and your spouse are filing separately, then you must meet the special requirements to claim the tax credit.

Are There State Adoption Credits As Well?
Some states offer an additional tax credit to their residents. These states include: Utah, North Carolina, Arizona, and California. However, every state has different guidelines and requirements, so be sure to discuss with your adoption attorney for further information.

Can My Company Reimburse My Adoption Expenses?
Some companies might offer adoptive parents a tax break through an adoption assistance program. In some cases, parents can claim from $3,000 to $8,000 in reimbursements from their employer. With that said, the parent cannot take the adoption tax credits for adoption expenses that were already reimbursed by the company. Discuss with your employer or HR for more information on your company’s policies.

There are a lot of things to consider when choosing to adopt and adoption costs are a major consideration. Fortunately, subsidies and tax credits make it easier for parents to choose to adopt. Not only does the adoption tax credit make adoption more affordable for parents, but it provides more opportunities for children to be placed in a loving and welcoming home.

Contact us to learn more about our adoption program, or give us a call at (800)-637-7999

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.

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