Having a new child come in to your family is one of the greatest events in life. Regardless how it happens, it is wonderfully fulfilling and also challenging. Usually however, a new family member is not financially rewarding. Kids are just expensive. However, for parents who adopt, there may be an even brighter silver lining to adding a new family member, and it starts with your tax return. There are some very lucrative tax benefits, tax credits and other financial benefits which may be available to adoptive parents under the individual income tax return rules.
Last year I had a client with a special situation where they adopted three siblings all at once. Bang, instant family. They were very happy with their new family and also surprised to find out that not only were they rewarded with three wonderful new family members, but they also instantly qualified for well over thirty thousand dollars in totally refundable adoption tax credits.
While the adoption credit is no longer refundable, you may still be eligible for a credit of up to $12,970 if you've adopted or are planning to adopt a child this year. Yes, you read correctly, an income tax credit of over twelve thousand dollars related to adoption costs -- in addition to other benefits. Also, if there is one other true statement about adoption, it is typically a very expensive undertaking. So tax credits, potentially a big one, is often very well received and deserved.
The adoption tax credit is available for adopted children who are under 18 years old and who are not the step-child of you or your spouse. The credit also applies to a child any age if they are physically or mentally incapable of caring for themselves.
Standard U.S. Adoptions
In cases other than special needs adoptions, the credit is based on qualified adoption expenses. Said another way, the credit is computed-based on the amount of adoption expenses incurred to complete the adoption -- the more that is spent, the higher the amount of the tax credit. Qualified adoption expenses are defined as reasonable and necessary expenses directly related to the legal adoption of a child under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include:
- Adoption fees
- Court costs
- Attorney fees
- Travel expenses
- Meals and Lodging
- Other expenses
Taxpayers cannot claim any expenses that were reimbursed.
There are some additional limitations on who can claim the adoption credit and how much credit they qualify for. Specifically, there is a taxpayer income limit, as with many credits, that limits or eliminates the credit for high income taxpayers. The full Adoption Credit is available for taxpayers with an income of up to $194,580. If your income is between $194,580 and $234,580, you may qualify for a reduced amount of credit. If your income is greater than $234,580 you will not be eligible for the credit. Because the credit is nonrefundable, you may only use the amount of credit necessary to reduce your income tax liability to zero. If your tax liability is less than your credit, you may carry over the remaining credit each year for up to five years or until you use it up. Most taxpayers who qualify for the credit eventually get to take it all over that six-year period, including the first qualification year and five carryover years.
For a domestic adoption, you can claim the credit the year after the expenses are paid, or the year the adoption is final, whichever comes first. For international adoptions, you must wait until the adoption is final to claim the credit.
Special Needs Adoptions
Special needs children are determined by the state or local child welfare departments. Most adoptions from the U.S. foster care system are considered special needs; all children who receive adoption subsidy or adoption assistance benefits have been determined to have special needs. If you adopt a special needs child you may qualify for the full amount of the adoption credit even if few or no adoption-related expenses were paid. Said another way, for special needs adoptions, and that includes multiple family member adoptions, the adoption credit is the full $12,970 per child regardless of the amount of expenses incurred.
If you are adopting internationally, the qualified expenses include the travel costs to the foreign country and lodging, food, and transportation while there. Many countries require the prospective parents to come to the country and be interviewed first then they must come back to the country for the adoption. The costs of all necessary trips to complete your adoption are eligible for the credit. You must wait until the adoption is final to claim the credit for expenses paid if you are adopting internationally.
To help taxpayers with adoption, the IRS also allows employers to offer a tax-favored employee benefit, the Employer Assistance Adoption Program. This program allows employers to pay up to $12,970 in pretax income towards an employee's adoption expenses per child. If your employer funds any portion of your adoption expenses through this program, you will still be eligible for the credit on any expenses you incur over what your employer reimburses or pays directly.
Adopting a child is a wonderful event. It can be a more wonderful event if you get some cash back on your tax return. If you are adopting or have adopted in recent years, be sure to understand the complex tax credits and rules and get all of the tax benefits you deserve -- and even go back and amend if you missed them in the last three years. The adoption process is complicated but once completed is very rewarding. The tax rules can be viewed the same: very complicated but at the end of the day with tax credits and possibly employer assistance, can be very financially rewarding.