Adoption Tax Credit

Adoption expenses often come as a surprise to adoptive parents. You can take a tax credit on your state and federal tax returns for the adoption fees and certain other out-of-pocket expenses you incurred in the adoption of your child.

Taxes and audits can be complicated for adoptive parents. If you need help with tax credits, you may want to discuss your situation with an attorney.

How Much Is the Adoption Tax Credit?

The allowed maximum amount for the federal tax adoption credit for tax year 2024 is $16,810 per child — up from $15,950 in 2023. The maximum amount adjusts each year based on inflation, which means it increases by a small amount each year.

The federal adoption tax credit has been around since 1996. Back then the maximum credit for adoption expenses per adopted child was $5,000. The tax credit has since increased.

How Does the Federal Adoption Tax Credit Work?

As the taxpayer, you subtract the adoption tax credit from your tax liability for the given tax year. This means you receive a "dollar for dollar" reduction of your federal tax liability. Depending on the circumstances, a taxpayer who paid qualifying tax expenses may claim the credit in the tax year that they paid the expenses or in the following tax year.

The federal tax credit is available for domestic adoptions (those that occur within the United States), as well as international adoptions.

You can carry forward any unused credit for five years.

Taxpayers who adopt a spouse's child can't claim the tax credit.

What Are Qualified Adoption Expenses?

The federal tax credit reimburses adoptive parents for “qualified adoption expenses." Qualified adoption expenses are those expenses that are “reasonable and necessary."

Adoption expenses may include:

• Court costs
• Attorney fees
• Agency fees
• Home studies
• Traveling expenses (including amounts spent for meals and lodging while away from home)
• Other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child

Foster care costs before adoption generally do not qualify. If you adopted your foster child, only the adoption-related expenses would apply for this federal tax credit.

Who Counts as an Eligible Child?

An eligible child must be under 18 years old or be physically or mentally incapable of caring for himself or herself. The adoption credit cannot be taken for a child who is not a U.S. citizen or legal permanent resident until the adoption becomes final.

An eligible child can also be a child with special needs if they're a U.S. citizen or legal resident. A state must first determine that the child cannot or should not return to their parent's home and probably will not be adopted unless assistance is provided. Under certain circumstances, you may increase the amount of your qualified adoption expenses if you adopted an eligible child with special needs.

Income Restrictions for Adoptive Parents

While the tax credit is available to most adoptive parents, there are income restrictions. The income limit on the adoption credit or exclusion depends on your modified adjusted gross income (MAGI). The MAGI thresholds are indexed each year for inflation.

Your income affects your adoption tax credit as follows:

• If your MAGI is below the phase-out amount for the year, the income limit will not affect your tax credit. This means that you can take the full credit.
• If your MAGI is more than the phase-out amount for the year, your tax credit will be reduced.
• If your MAGI exceeds the maximum phase-out amount for the year, your tax credit will be eliminated.

In 2024, the full federal tax credit is to adoptive parents whose MAGI is less than $252,150. A reduced tax credit is available for adoptive parents whose MAGI is more than $252,150 but less than $292,150. Adoptive parents whose MAGI is more than $292,150 are not eligible for the tax credit.

Generally, if you're married, you must file a joint return to take the adoption tax credit or exclusion. If you are filing as married but separately, you can take the tax credit or exclusion only if you meet special requirements.

In addition to the tax credit, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

Exclusions from Federal Adoption Tax Credit

The adoption credit is not available for reimbursed expenses. Many employers offer a subsidy to reimburse employees for some of their adoption fees. This reimbursement is not part of the tax credit, however, the reimbursement is tax-deductible.

The amount of your adoption credit or exclusion is limited each year to your effort to adopt an eligible child. The dollar limit for a particular year is reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort. If you can take both a credit and an exclusion, this dollar amount applies separately to each.

For example, let’s assume the dollar limit for the year is $10,000. Say you paid $9,000 in qualifying adoption expenses for final adoption, while your employer paid $4,000 of additional qualifying adoption expenses. You may be able to claim a credit of up to $9,000 and also exclude up to $4,000 (IRS Tax Topic 607: Adoption Credit).

If I Adopt Siblings, Does the Adoption Tax Credit Increase?

Yes, your total maximum tax credits may be higher if you adopted multiple children in the same year. The adoption tax credit applies per child, regardless of their biological relation to each other. For example, if you adopted twins, you may claim up to twice the maximum credit for that year.

The actual credit you can claim still depends on your qualified adoption expenses, income, and exclusions. So you might not qualify to receive the entire maximum amount for multiple adopted children.

Does the Adoption Tax Credit Apply to Failed Adoption?

Yes, you can claim the tax credit if you have a failed domestic adoption. Even when an adoption is unsuccessful, you may want to keep the records and receipts for tax time. The credit still only applies to qualified adoption-related expenses.

However, you can't claim the tax credit for a failed international adoption. The IRS only allows credit for qualified adoption expenses during the year you finalize the foreign adoption. If you try to adopt a child outside the United States, but the adoption fails, then it won’t be finalized. Without finalization, the expenses won’t qualify in any year.

Filing Procedure for the Adoption Tax Credit

To take the credit, complete IRS Form 8839, Qualified Adoption Expenses. You will attach IRS Form 8839 to the IRS Form 1040 or IRS Form 1040A tax return as appropriate.

After filing for the adoption tax credit on their federal income tax returns, adoptive families should prepare themselves. You may need to answer questions about the amount of the credit claimed on your tax return.

For questions about IRS inquiries, audits, or how to file Form 8839, it is best to speak to a qualified tax professional or tax lawyer.

How Often Are Adoption Tax Credits Audited?

The IRS frequently audits tax returns claiming an adoption tax credit. According to the National Taxpayer Advocate Service, in 2012 the IRS audited 60 percent of the tax forms that claimed the adoption benefit because of concerns about fraud.

The reason many audits occur is partly due to the high value of the credit. For instance, the maximum adoption tax credit is up to eight times higher than the regular child tax credit. The IRS wants to ensure the claim is legitimate.

How Often Does the IRS Deny Adoption Tax Credits?

Though audits are common, denial of the adoption tax credit is rare. The IRS disallowed only 1.5 percent of those audited claims in 2012. However, nearly half of the audits ended with a different amount of credits than the initial filing.

Despite the low rate of denials, audits for this credit are still common. Scrutiny of the tax credit continued even after 2012, according to anecdotal reports from adoptive families.

In 2022, two Congressmen introduced the Protecting Adopting Families from Audits Act (H.R.9612). They expressed concern that these audits place an unnecessary burden on adoptive families. This bill’s goal was to investigate how the IRS decides to pursue these audits. Yet, Congress did not move the bill forward.

How Will I Know If My Taxes Are Being Audited?

The IRS will send you a letter in the mail if your adoption tax credit leads to an audit. Notice of an IRS audit does not involve phone calls, so beware of any potential tax scams.

The IRS letter will explain what to do next. You must provide copies of any documents it requests before the deadline. These documents often include legal adoption papers or proof that your adopted child lives with you.

Do I Need a Tax Law Attorney After Adoption?

Adoptive parents may find working with a lawyer helpful when claiming an adoption tax credit. Tax preparation can be challenging, especially if you add a family member during the year. Tax issues and audits can further complicate the process.

A tax attorney may make an audit easier in several ways, including:

• Explaining what specific requirements you must fulfill during the audit
• Communicating with the IRS directly on your behalf
• Helping you gather documentation and complete tax forms properly
• Advising you on complex tax scenarios and family circumstances beyond the adoption itself
• Defending you against any potential tax fraud accusations

You may find that hiring a lawyer reduces any anxiety about the audit process and your tax liability. This peace of mind can let you focus on parenting your new child during your first year together.

The Child Tax Credit

If you qualify for the federal adoption tax credit, you may also apply for the child tax credit. Your adoptive child may be more likely to qualify for the credit if they have lived with you or received your financial support for at least half the year.

State Adoption Tax Credits

Many states offer adoption tax credits, but some states do not. In most instances, adoptive parents can take advantage of the state adoption tax credit in addition to the federal adoption tax credit. The amount and details for qualifying for the state-level credit vary from state to state.

For example, California offers a state adoption tax credit if the parents adopt a child from a California public agency or county. The credit is for half of the fees paid for the adoption, with a limit of $2,500 per child. Georgia tripled the state adoption tax credit in 2021. The allowed tax credit increased from $2,000 to $6,000 a year per child for up to 5 years. Ohio scrapped its $10,000 state tax credit in 2023, replacing it with a grant program that provides adoptive families with grants that range from $10,000 for most families to $15,000 for families that adopt a child after foster care to $20,000 for families that adopt a special needs child.

State adoption laws and tax credits vary widely. Check your state government’s tax resources to understand whether additional credits may be available for you.

Get Professional Legal Help With the Adoption Tax Credit

The adoption process is quite complicated, but it doesn't end when the adoption is finalized. If you're having trouble determining your eligibility for the adoption tax credit or need legal help with any other adoption-related matter, you may benefit from legal counsel.

Find an experienced tax law attorney familiar with adoption tax credits near you today.