Adoption

The Basics:

  • Claim the Adoption Credit or exclude up to $13,460 for qualifying adoption expenses.
  • Qualified expenses include adoption fees, court costs, attorney fees and travel expenses.
  • Claim the credit the year after you pay expenses or the year the adoption is final, whichever comes first.

The adoption tax credit became permanent in 2013, however, it is no longer a refundable credit. This means that in order to take advantage of the credit you must have a tax liability to utilize the credit, most First, check with your employer about assistance, because some companies offer a program that pays for a portion of adoption expenses. I don’t know of any airline that offers this benefit, but some of your “more progressive” companies may. The Adoption Credit is not available for any reimbursed expense that you may receive, but certain amounts reimbursed by your employer for qualifying adoption expenses may be excluded from your gross income. We can’t double dip on this deduction but on the other hand, you don’t have to pay tax on this extended benefit if you should receive it.

How does it work?

The Adoption Credit could reduce your tax liability by as much as $13,460 per child for any type of adoption. You may claim both a credit and exclusion for the expenses of adopting an eligible child. In other words, you may be able to claim a credit of up to $13,460 and also exclude up to $13,460 from your income. However, you can’t claim both a credit and exclusion for the same expense.

To qualify for the credit:

  • You must adopt an eligible child (failed US adoptions still qualify for the credit)
  • You must pay qualified adoption expenses.

The credit and exclusion are reduced if your modified adjusted gross income is between $201,920 and $241,920. You can’t claim either the credit or the exclusion if your modified adjusted gross income is $241,920 or more.

Is my child eligible?

An eligible child is one who is either younger than 18 or physically or mentally incapable of self care. A special needs child must have been a U.S. citizen or resident at the time the adoption procedure began, a state must have determined that the child shouldn’t be returned to his or her parents’ home, and the state must have determined that the child will not be adopted without assistance from the state. States make this determination based on a variety of factors that include:

  • the child’s ethnic background
  • the child’s age
  • the child’s minority status
  • whether the child has siblings
  • whether the child has a chronic medical condition
  • whether the child has an emotional or physical handicap

Which adoption expenses qualify?

Adoption expenses covered by the credit include:

  • all adoption fees
  • court costs
  • attorney fees
  • travel expenses (including meals and lodging while away from home)
  • other expenses directly related to the legal adoption of an eligible child

For 2016, you can’t include more than $13,460 of qualified expenses. If you’re adopting a special needs child, treat $13,460 as the amount you paid regardless of the amount you actually spent.

What expenses don’t qualify?

There are several adoption-related expenses that are not eligible for the credit. Some of these include:

  • expenses that violate state or federal law
  • expenses associated with surrogate parenting arrangements
  • expenses associated with the adoption of your spouse’s child
  • expenses paid with funds received from any government program
  • expenses allowed as a credit or deduction under any other federal income tax provision
  • expenses paid or reimbursed by an employer or someone else

When do I claim this credit?

If you’re adopting a U.S. child, you claim the tax credit in the year after you incur the expense or the year the adoption becomes final, whichever comes first. For example, if you pay for a home study in 2014 but your adoption isn’t finalized until 2017, you claim the Adoption Credit in 2015 for the expenses incurred in 2015. The credit for expenses you pay in a year after the adoption is final is claimed in the year the expenses were paid. Look at it this way – any expenses that are occurred before the adoption are taken in the year of the adoption, but any expenses that occur after are taken in the year they are paid.

In the case of a U.S. child, you can claim the credit even if your adoption of the child fails. However, if your adoption involves a foreign child, you can take the credit only if the adoption is finalized.

You may claim the credit for more than 1 year. For example, assume you spent $500 in 2011 for a home study to adopt a U.S. child, then an additional $3,000 in court costs and adoption agency fees in 2012. If the adoption wasn’t finalized until 2013, you would claim a $500 credit in 2012 and a $3,000 Adoption Credit in 2013 along with the rest of the costs incurred in 2013 (if any). But again, for foreign children, no credit may be taken until, and only if, the adoption is finalized.

Adoption Assistance Amounts

Eligible taxpayers may claim a credit for adoption benefits or exclusion for employer-provided adoption assistance. The applicable amounts apply for both the credit and the exclusion.

2016

Maximum credit/exclusion $13,460 per child

Modified AGI phase-out range* $201,920 – $241,920

See IRS Topic 607