Adoption Tax Credit

Adopting a child can cost thousands of dollars. This often comes as a surprise to adoptive parents. Notably, federal and state tax benefits can help reduce the cost. 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.

Federal Adoption Tax Credit Basics

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 increased. The allowed maximum amount for the federal tax adoption credit for tax year 2023 is $15,950. The maximum amount adjusts each year based on inflation, which means that it increases by a small amount each year.

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." Such expenses 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 (including a child with special needs)

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 and a state determines 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

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). If your MAGI is below the phase-out amount for the year, the income limit will not affect your tax credit which 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. The MAGI thresholds are indexed each year for inflation.

In 2023, the full federal tax credit is to adoptive parents whose MAGI is less than $239,230. A reduced tax credit is available for adoptive parents whose MAGI is more than $239,230 but less than $279,230. Adoptive parents whose MAGI is more than $279,230 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, if we assume the dollar limit for the year is $10,000 and 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).

Does the Adoption Tax Credit Apply to Failed Adoption?

You can claim the tax credit if you have a failed domestic adoption. However, qualified adoption expenses incurred as a result of international adoption are only allowed in the year in which the adoption was finalized. This means that if you choose to adopt a child from a foreign country and the adoption fails, then you can't claim the tax credit for the failed foreign adoption.

Filing Procedure for 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.

Having filed for the adoption tax credit on their federal income tax returns, adoptive families should prepare themselves to answer questions about the amount of the credit claimed on their tax return. 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 IRS disallowed only 1.5 percent of the claims. Scrutiny of the tax credit has continued even after 2012, according to anecdotal reports from adoptive families.

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.

Child Tax Credit

If you qualify for the federal adoption tax credit, you may also qualify for the Child Tax Credit.

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 and replaced 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.

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.