Adoption Credit and Exclusion

Adopting a child is a significant and often costly endeavor. To help offset these expenses, the U.S. government provides financial assistance through tax credits. Specifically, Internal Revenue Code Section 23 offers an Adoption Credit, which can help taxpayers reduce their tax liability by allowing them to claim a credit for qualified adoption expenses. This topic page will explain the Adoption Credit in detail, including who qualifies, what expenses are eligible, the limitations on the credit, and how to claim it.

What is the Adoption Credit?

The Adoption Credit is a tax benefit available to individuals who incur expenses related to the adoption of a child. This credit allows taxpayers to deduct a portion of their adoption costs directly from their tax bill, effectively reducing the amount of tax owed.

Key Features of the Adoption Credit:

• Qualified Expenses: The credit applies to qualified adoption expenses that taxpayers incur when adopting a child.
• Credit Amount: The maximum credit amount is $10,000 per adoption. For special needs adoptions, the credit is automatically considered up to that amount, regardless of actual expenses.
• Refundable Portion: A portion of the credit may be refundable, meaning that even if you owe no taxes, you could receive a refund.

Who Qualifies for the Adoption Credit?

Eligible Taxpayers

The Adoption Credit is available to individual taxpayers, including single individuals and married couples. Married couples must file a joint return to claim the credit.

Eligible Children

To qualify for the Adoption Credit, the adopted child must meet specific criteria:

• The child must be under the age of 18 at the time of adoption.
• Alternatively, the child may be any age if they are physically or mentally unable to care for themselves.

Special Needs Adoptions

If a child is classified as having special needs, the taxpayer may qualify for the full credit amount of $10,000, regardless of the actual qualified expenses incurred. A "child with special needs" is defined as a child for whom:

• A state or tribal government has determined that they cannot return to their birth family.
• There exists specific factors or conditions that make it likely the child cannot be placed for adoption without assistance.

What Are Qualified Adoption Expenses?

Qualified adoption expenses include a variety of costs directly related to the legal adoption of an eligible child. These expenses can cover:

• Adoption Fees: Payments made to adoption agencies or attorneys for facilitating the adoption process.
• Court Costs: Fees associated with filing legal documents and court proceedings related to the adoption.
• Attorney Fees: Legal fees incurred for legal representation in the adoption process.
• Other Expenses: Reasonable costs that are necessary for the adoption, such as home study fees, travel expenses for adopting parents, and required medical exams for the child.

What Expenses Are Not Qualified?

Not all expenses related to adoption qualify for the credit. Examples of non-qualifying expenses include:

• Costs incurred due to surrogate parenting arrangements.
• Expenses related to the adoption of a spouse's child.
• Any expenses that have already been reimbursed by an employer or through government programs.

How Much is the Adoption Credit?

Basic Credit Amount

The Adoption Credit allows taxpayers to claim a maximum of $10,000 for the adoption of a child. This amount is subject to certain limitations based on the taxpayer's income.

Special Needs Adoption Credit

For adoptions involving children with special needs, the taxpayer is treated as having incurred $10,000 in qualified expenses, even if actual expenses were less. This provision helps to ensure that families adopting children with special needs receive adequate financial support.

Income Limitations

The Adoption Credit is subject to income limitations. If a taxpayer's adjusted gross income (AGI) exceeds $150,000, the allowable credit will begin to phase out. The credit is reduced by the ratio of the AGI exceeding $150,000 to $40,000. For example, if your AGI is $160,000, the credit would be reduced because it exceeds the threshold by $10,000.

Carryforward of Unused Credit

If the total credit exceeds the taxpayer's tax liability for the year, the unused portion can be carried forward to future tax years. However, it cannot be carried forward beyond five taxable years.

Claiming the Adoption Credit

Filing Requirements

To claim the Adoption Credit, taxpayers need to complete Form 8839, "Qualified Adoption Expenses." This form requires details about the adoption and the expenses incurred. Additionally, taxpayers should include the following information about the adopted child:

• Name
• Age
• Taxpayer Identification Number (TIN)

If the TIN is not known, the taxpayer may be required to provide alternative information to the IRS.

Example of Claiming the Credit

Imagine a taxpayer, Jane, who incurred $8,000 in qualified expenses while adopting a child. Jane's AGI is $100,000. She can claim the full $8,000 as a credit against her tax liability.

In a separate scenario, consider John and Lisa, who adopt a child with special needs. Regardless of their actual expenses, they can claim the full $10,000 credit. If their AGI is $160,000, they will need to calculate the phased-out credit based on their income.

Conclusion

The Adoption Credit under Section 23 provides financial relief to families adopting children. Maintain accurate records of adoption expenses and file Form 8839 to claim the credit. Consult a tax professional if you have questions about eligibility or claiming the credit.