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2018 Adoption Tax Credit Information

Some families find that adopting a child can put a strain on family finances. It’s understandable, because the cost of the adoption process can be high. All of the necessary services that go into the process can make the financial aspect of adoption a little stressful. But did you know you may be eligible for adoption tax benefits? There are several available adoption tax credits and benefits that may be able to offset your qualified adoption expenses.

Taxes can be very complex, and most people find them confusing. Here, we’ll lay out the basics about the adoption tax credit and answer some of the most common questions. This should get you started in understanding how adoption could affect you financially. It is always a good idea to speak with a tax professional alongside your own research into the subject.

The Federal Adoption Tax Credit

What is the adoption tax credit? While the exact details of the credit have shifted over the years, it has been around in one form or another for quite some time. In January of 2013, the Federal Adoption Tax Credit was made permanent. It is a means for adoptive families to offset some adoption costs.

Is The Adoption Tax Credit Refundable?

The adoption credit is not refundable, which means that only those individuals with tax liability (taxes owed) will benefit. If you are unsure how this will affect your eligibility to use the adoption tax credit, you should speak with a tax professional.

How Much is the Adoption Tax Credit?

The amount families are eligible to receive from the Federal Adoption Tax Credit depends on their unique situation. Below is a table outlining the maximum amount available for the 2018 Federal Adoption Tax Credit, as well as a few previous years.

Tax Year

Maximum Amount Available*

Adoption Tax Credit 2014

$13,190

Adoption Tax Credit 2015

$13,400

Adoption Tax Credit 2016

$13,460

Adoption Tax Credit 2017

$13,570

Adoption Tax Credit 2018

$13,840

*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 $13,840, you may use only $8,000 credit for that year. However, you may carry forward the $5,840 unused credit for up to five years.

The adoption tax credit for special needs children (children who are deemed hard to place by a child welfare agency) will remain flat, allowing those families to claim the maximum credit regardless of expenses. Talk to your adoption professional to determine whether your adoption qualifies as “special needs.”

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 2018 Adoption Tax Credit, the maximum amount available will begin to phase out for families with MAGI above $207,580 and will be unavailable to families with incomes around $247,580 or above.

Adoptive parents who work for companies with an adoption assistance program can also receive tax breaks for adoption. 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 our guide to employer-provided adoption benefits to learn more about these adoption assistance programs.

How Does the Adoption Tax Credit Work?

Adoption and taxes can be complicated, so we’ll let the IRS explain. 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.” These “qualified adoption expenses” make up the amount a family can claim on the adoption tax credit.

Qualified adoption expenses for tax deductions include items like:

  • Adoption fees

  • Attorney fees

  • Court costs

  • Travel expenses (including meals and lodging) while away from home

  • Re-adoption expenses relating to the adoption of a foreign child

Qualified expenses must be solely put toward adoption costs, meaning funds allowed as a credit or deduction under any other provision in the tax law cannot be applied toward the adoption tax credit. Qualifying expenses must be accrued in a domestic, international or foster care adoption. Unfortunately, there is no federal stepparent adoption tax credit or surrogacy tax credit. For a full list of adoption expenses the IRS does not qualify, visit their website.

For domestic adoptions, you can claim the adopted child tax 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:

  • The final adoption decree

  • A placement agreement from an authorized agency

  • Court documents

  • A state’s determination for special-needs children, if applicable

Follow these links to Form 8839 for qualified adoption expenses and Instructions to File Form 8839 on the IRS website to learn how to file an adoption tax credit form and for information regarding required attachments.

State Tax Credits for Adoption

We’ve covered some information about the federal adoption tax credit, but what about taxes at the state level? Are there any tax benefits of adopting a child in your state? A number of states do also offer an additional tax credit for adoption 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 could be eligible to receive these credits as well.

The Tax Credit for Adoption in the Case of Disruptions

An adoption disruption can be a devastating experience. Although most families will not experience a disruption, those who do are left with a lot of questions. There is, of course, the emotional loss to deal with. There are also practical questions concerning finances.

Families who experience a disrupted adoption could 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 for a failed adoption tax credit, as this situation can be very complex.

Dependency Tax Exemption

Through the adoption process, we believe that family is formed by love. The IRS believes family is formed by financial dependency. In this case, that means that adoptive parents may take the same dependency exemption on their income taxes for children who come home through adoption (and children placed with a family 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.

Claiming the 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. Adoption finalization typically occurs around six months after placement in a domestic infant adoption — which means your child could already be under your care when it is time to file taxes, but the finalization hearing hasn’t happened yet.

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 adoption tax ID number for the baby. Typically, 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.

This is a lot of information, and you probably have more questions about the tax credit for adopting a child in your specific situation. You can speak with a tax professional about these questions, and you can also speak with an adoption specialist for more information about the Federal Adoption Tax Credit by contacting American Adoptions at 1-800-ADOPTION.

*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.

Disclaimer
Information available through these links is the sole property of the companies and organizations listed therein. America Adoptions, Inc. provides this information as a courtesy and is in no way responsible for its content or accuracy.

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Frequently Asked Questions

Do we need to retain our own attorney?

No, American Adoptions has established relationships with some of the best adoption attorneys in the nation. Because adoption laws vary from state to state and between counties, it is important to utilize the services of an adoption attorney who specializes in the state where the adoption will finalize, which is unknown until you match with an expectant mother. You have the right to retain your own attorney, but doing so may be an additional, unnecessary expense.

Can we choose the gender of our baby?

American Adoptions accepts a limited number of families into our gender-specific program. Please contact us at 1-800-ADOPTION to learn whether we are currently accepting families into this program. With this option, families pay an additional Gender-Specific Fee to help our agency locate and work with birth mothers meeting this additional criterion. This fee is in addition to other program fees and covers additional advertising. The fee is not considered part of your adoption budget. Please note that gender specificity will likely increase your wait time significantly.

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