By Stanton Phillips, Esquire
Adoptive parents may be eligible to take a tax credit of up to $14,890.00 for qualifying expenses paid toward the adoption of a child. Since it is a tax credit, not a deduction, it is an amount you subtract from your tax liability. In other words, a dollar-for-dollar credit against what you pay in federal income taxes.
Additionally, up to $14,890.00 may be paid or reimbursed by your employer for qualified adoption expenses under an adoption assistance program and may be excluded from the gross income. You may claim both a tax credit and an exclusion provided that you do not claim them for the same expense.
QUALIFYING EXPENSES
Reasonable and necessary adoption fees, court costs, attorney fees, travel expense, and
other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. Non-qualifying expenses include adopting your spouse’s child (stepparent), surrogacy and any expenditure that violated state or federal law.
LIMITS ON TAX CREDIT
The credit of up to $14,890.00 is for each effort to adopt an eligible child. The amount stated is the maximum amount per child that can be taken over multiple years. If two children are adopted, then the tax credit can be $29,780.00. If an adoption attempt fails or falls through, the adoptive parents may still obtain the tax credit provided the intended child was a U.S. citizen or legal resident.
INCOME LIMITS
The income limit for the adoption tax credit or exclusion is based on a modified adjusted gross income (MAGI). Each year the income levels and amount of credit are adjusted for inflation.
| If Your MAGI Is | The Income Limit |
|---|---|
| $223,410 or Less | Will not affect your credit or exclusion |
| $223,411 to $263,409 | Will reduce your credit or exclusion |
| $263,410 or More | Will eliminate your credit or exclusion |
WHEN TO TAKE CREDIT
If the eligible child is a U.S. citizen or resident, you can take the adoption credit or exclusion even if the adoption never becomes final.
| IF you pay qualifying expenses in…. | THEN take the credit in…. |
|---|---|
| any year before the year the adoption becomes final | the year after the year of the payment |
| the year the adoption becomes final | the year the adoption becomes final |
| any year after the year the adoption becomes final | the year of the payment |
| IF your employer pays for qualifying expenses under an adoption assistance program in…. | THEN take the exclusion in…. |
| Any year | the year of the payment |
If the child is not a U.S. citizen or legal resident, you cannot take an adoption tax credit or exclusion unless the adoption becomes final. If your employer makes an adoption assistance payment in a year before the adoption is final, then that payment is treated as income in the year it is paid.
| IF you pay qualifying expenses in…. | THEN take the credit in…. |
|---|---|
| any year before the year the adoption becomes final | the year after the year of the payment |
| the year the adoption becomes final | the year the adoption becomes final |
| any year after the year the adoption becomes final | the year of the payment |
When is a foreign adoption considered final?
IR-3 and IH-3 Visa- If a child enters the U.S. on an IR-3 or IH-3 Visa, an adoption is considered final the year the authority in the foreign country enters decree of adoption. If you are pursuing a re-adoption and have already taken a tax credit, you may take the difference in the tax credit from the year you finalized in the foreign country and the year you re-adopt in the U.S. (Each year the credit is adjusted for inflation, so if you adopted in 2007 when the credit was $11,390, a re-adoption in 2022 can be eligible for another $3,500 credit).
IR-4 or IH-4 Visa- Only treated as final in the year in which a court of the state in which the child and parents reside enters a final decree of adoption or re-adoption.
CHILDREN WITH SPECIAL NEEDS
Children who receive a state adoption subsidy because of their special needs or because they are considered hard to place, receive the maximum credit and exclusion, subject to the income and tax liability limits. In other words, if you adopt a child with a subsidy, you can receive a tax credit for the full $14,890.00 even if you did not have those expenses. This limit is reduced or eliminated if you are over the income levels ($223,410-$263,410).
NOT TAX OR LEGAL ADVICE
This information is provided for general educational purposes and is not meant as tax advice or legal advice. This is a general summary, is not inclusive of every situation, and its accuracy may be subject to interpretation or evolving rules or court decisions. Please consult your tax advisor for advice on how the tax credit may benefit you.
