Adopting a child is expensive. If you do it through an adoption agency or privately, it can cost anywhere from $5,000 to $40,000 or more. International adoptions can range from $7,000 to $30,000. The federal government wants to encourage adoptions and has put its money where its mouth is by establishing an adoption tax credit.
For 2018, the amount of the allowable adoption credit is $13,840 (it was $13,570 in 2017). This generous credit is a permanent part of the tax law, and was not affected by the Tax Cuts and Jobs Act, which took effect on January 1, 2018.
Who Qualifies for the Credit?
You qualify for the adoption tax credit if you incur out-of-pocket expenses to adopt a child under 18 years of age, or a child of any age who is physically or mentally disabled. The child can be a United States citizen or resident alien (a "U.S. child" in IRS parlance), or a nonresident alien. If you attempt to adopt a U.S. child, you may be able to claim the credit before the adoption becomes final.
However, the credit is not available for taxpayers at higher income levels. The adoption credit begins to phase out if your modified adjusted gross income (MAGI) is more than $207,850 in 2018 ($203,540 in 2017) and it is completely phased out for taxpayers with MAGI of more than $247,580 in 2018 ($243,840 in 2017).
What Can the Credit Be Used For?
The credit applies to all reasonable and necessary adoption expenses, including adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child. However, you cannot claim the credit for:
expenses for adopting your spouse's child
payments to a surrogate parent
payments that violate state or federal law
payments that are reimbursed by your employer or any other organization, or
expenses you paid using funds you received from a federal, state, or local program.
How Much Is the Credit?
Unless you adopt a child with special needs, the adoption credit is limited to the amount of your out-of-pocket adoption expenses. Moreover, the credit is not refundable, meaning you only benefit from it if you owe federal income taxes. However, any unused credit amount can be carried forward to reduce your tax liability for the next five years until the credit is used up. For example, if your tax liability is $10,000 and your credit is $12,000 that tax year, the adoption credit would reduce your tax liability to zero for that tax year and you could carry the remaining $2,000 credit forward to deduct in any of the next five years.
Adopting Children with Special Needs
If you adopt a child with special needs, you are entitled to claim the full amount of the adoption credit, even if your out-of-pocket expenses are less than the tax credit amount. For example, even if you incur no expenses to adopt a special needs child, you are still entitled to the full credit amount.
A child has special-needs if:
the child is a United States citizen or resident
a state determines that the child cannot or should not be returned to his or her parent's home, and
a state determines that the child probably will not be adopted unless assistance is provided.
What If The Adoption Is Unsuccessful?
If your attempt to adopt a U.S. child proves unsuccessful, you may still claim the full adoption tax credit. You do so the year after the adoption failed. On the other hand, expenses for a foreign adoption (where the child was not a U.S. citizen or resident at the time the adoption process began) qualify only if you finalize the adoption.
When Can You Claim the Adoption Tax Credit?
If you adopt (or attempt to adopt) a U.S. child, you may claim the adoption tax credit the year after you incurred the adoption expenses. But, if you finalize the adoption the same year you incurred the expense for a U.S. child adoption, you may claim the credit that year. You may claim the credit for an international adoption only the year after the adoption was finalized.
How Do You Claim The Adoption Tax Credit?
To claim the adoption tax credit, you must complete IRS Form 8839,Qualified Adoption Expenses, and include it with your income tax return. Be sure the keep receipts and other documentation for your adoption expenses as well as the paperwork showing you adopted (or attempted to adopt) a child. You don't need to file these with your tax return. Just keep them with your records.
Your State May Also Offer Adoption Tax Credits
Many states offer adoption tax credits of their own that you can use to reduce your state income taxes. The amounts vary from state to state. Check with your state tax department for details.