Those embarking down the path of their first adoption are often unaware of how expensive giving a child a permanent home can be. However, the U.S. Federal Government via the IRS offers those who adopt the Federal Adoption Tax credit. While this child adoption tax credit is designed to help offset some of the costs involved in adoption, it is also one of the least understood facets of the entire adoption process.
This child adoption tax credit was first introduced in 1997 and was finally made permanent in 2012 when the Obama administration signed the Taxpayer Relief Act into law.
Under the Federal Adoption Tax Credit, all forms of adoption except for step-parent adoption are eligible, including:
- Domestic adoptions – both private and through an agency
- International adoptions
- Adoptions of those in public foster care
Specifics of Who Can Claim
If an individual is adopting internationally, he or she will be able to claim all qualified expenses once the adoption has been legally completed. One can claim these expenses up to the maximum as prescribed under the Federal Adoption Tax Credit rules.
Those who adopt children with special needs can file for the maximum credit allowed under this law regardless of whether they have qualified expenses or not. To qualify as a special needs child, the state or county child welfare agency must deem that the child will most likely not be adopted unless the government steps in and offers assistance to the adopting family.
What Expenses are Covered?
According to section 23(d)(1) of the Adoption Tax Code, the following expenses are considered eligible for credits:
- All reasonable and necessary fees charged for the adoption
- All attorney’s fees and court costs
- Any travel expenses incurred – including lodging and meals during the time when the adopting party is away from home.
- Any miscellaneous expenses that are directly related to and used for the principal purpose of adopting a qualified child.
How Much Is Available Under this Tax Credit
For the 2017 tax year, the maximum amount available is $13,570 provided that the adopting individual’s modified adjusted gross income on his or her 2017 tax filing is equal to or less than $203,540. Those whose income falls between $203,540 and 243,540 may be eligible for a reduced tax credit. Those whose income is over this amount are not eligible this child adoption tax credit.
When Can One Claim This Tax Credit?
If an adopted child was born in the U.S. or is a legal resident alien, an adopting party can claim the credit in the year following the adoption. However, if one finalizes the adoption in the same year as the expenses occurred, he or she may be able to claim this credit in the same year. If unsure regarding the specifics, it’s best to consult with a tax professional. For those who incur any expenses in the year following an adoption’s finalization, they may still be able to file for the tax credit in the same year the expenses were incurred.
What If the Adoption Does Not Go Through?
Even if an adoption does not go through, the IRS still allows an individual to claim many of the expenses incurred as a direct result of the attempt to adopt. These expenses can be claimed in much the same way as those would be claimed if an adoption was not completed by the end of the calendar year. However, if one is attempting an international adoption, it must be finalized in order to claim the expenses.
How to File
In order to claim the Federal Adoption Tax Credit, one must complete IRS Form 8839, “Qualified Adoption Expenses,” and add it to his or her IRS Form 1040 or 1040A. Married couples must file a joint tax return in order to claim the tax credit. Those who are married and file separately must meet very specific requirements in order to qualify for the credit.
Understanding the costs involved in adoption is a very important part of the process. At the same time, all parties should be aware not only of the Federal Adoption Tax Credit program but also of any credits or programs states offer as well to help offset the expenses involved in adopting a child.
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