Some adoptive families find that adopting a child can put a strain on family finances. But there are several available adoption tax credits and benefits that may be able to offset your adoption expenses.
The Federal Adoption Tax Credit
Some adoption costs can be offset by utilizing the Federal Adoption Tax Credit, which is non-refundable, for all qualifying adoption expenses. In January 2013, the Federal Adoption Tax Credit was made permanent. The adoption credit is not refundable, which means that only those individuals with tax liability (taxes owed) will benefit.
Below is a table outlining the maximum amount available for the 2016 Federal Adoption Tax Credit and a few previous years.
Maximum Amount Available*
Adoption Tax Credit 2014
Adoption Tax Credit 2015
Adoption Tax Credit 2016
*The maximum amount available will continue to grow each year with the cost of living. It should also be noted that the maximum amount available is per child. Additionally because the adoption tax credit is nonrefundable, if your liability is less than your total available credit, you may only use what you owe in taxes until the following year. For example, if your liability is $8,000 and your credit is $13,460, you may use only $8,000 credit for that year. However, you may carry forward the $5,460 unused credit for up to five years.
However, the credit will remain flat for special needs adoptions (those involving children who are deemed hard to place by a child welfare agency), allowing those families to claim the maximum credit regardless of expenses.
The adoption tax credit income limit is based on modified adjusted gross income (MAGI) and is recalculated each year based on current cost of living. For the 2016 Adoption Tax Credit, the maximum amount available will begin to phase out for families with MAGI above $201,920 and will be unavailable to families with incomes around $241,920 or above.
Adoptive parents who work for companies with an adoption assistance program also receive a tax break. Parents can receive up to $13,400 in reimbursement from their employer for adoption expenses without paying taxes on that benefit. However you cannot double-dip, meaning you cannot take a tax credit for adoption expenses already reimbursed by your company. Speak with a tax professional to make sure this is correctly noted in your W-2 Form, and read Employer-Provided Adoption Benefits to learn more about these adoption assistance programs.
What Are Qualifying Adoption Expenses?
The IRS writes: “Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.
Qualified adoption expenses include:
Funds allowed as a credit or deduction under any other provision cannot be applied toward the adoption tax credit. Qualifying expenses must be accrued in a domestic, international or foster care adoption; surrogacy or stepparent adoptions do not qualify for the tax credit. For a full list of expenses that the IRS does not qualify, visit their website.
For domestic adoptions, you can claim the credit for adoption-related expenses in the year the adoption is completed. If the adoption is not completed, you can claim the credit the following year. Be sure to keep a close record of your adoption, as the adoption tax credit could be audited by the IRS for authenticity. You’ll want to be ready with documents such as:
Follow these links to Form 8839, Instructions to File Form 8839 and an Adoption Benefits FAQ on the IRS website to learn how to file for an adoption tax credit or exclusion and for information regarding required attachments.
State Adoption Tax Credits
A number of states also offer an additional adoption tax credit to their residents. If you live in a state that offers a state-level adoption tax credit (amounts vary by state), ask your tax professional if you may receive these credits as well.
Adoption Disruption - Tax Credit Benefit Still Applies
Families who experience a disrupted adoption (a situation that did not end in a completed adoption) may also benefit from the adoption tax credit. A family that qualifies for the adoption tax credit may also deduct qualifying adoption expenses from a disrupted adoption. However, families must wait one year before filing for the credit. The maximum credit level also still applies - no matter how many adoptions or disruptions a family experienced during the year. Please refer to a tax professional to see if your family is eligible.
Dependency Tax Exemption
Adoptive parents may take the same dependency exemption on their income taxes for adopted children (and children placed with them in a not-yet-finalized adoption) as they would for biological children. The exemption reduces taxable income. Families must provide more than half of a child's support to list the exemption.
Adoption Tax Credit Before Finalization
Every year, adoptive families ask if they can file taxes without their child’s social security number, which is typically received after the adoption is finalized.
Your adoption attorney should apply for an SSN along with the final amended birth certificate after the finalization court hearing. If you do not have these items yet, you or your accountant and/or tax representative can apply for a temporary tax identification number for the baby. You can file your taxes with that number. Here is a link to Form W-7A for information about obtaining a temporary tax ID number. You can also search the IRS website for Adoption Taxpayer Identification Number information.
For more information on the adoption tax credit and exclusion, visit www.irs.gov. American Adoptions recommends that you contact a local accountant or qualified tax professional for more specific information for your family.
*DISCLAIMER: American Adoptions does not offer tax advice and recommends that you talk to your tax professional for specific information on how the Adoption Tax Credit can benefit your family.
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