Adoption can be expensive, but there is potential financial relief in the form of adoption tax credit. This credit is designed to help alleviate the financial burden of adoption and make it more accessible to prospective adoptive parents. However, understanding the adoption tax credit process and requirements can be complicated. In this comprehensive guide, we will break down everything you need to know about adoption tax credit, from eligibility criteria to maximizing benefits, adoption tax credit rules and navigating the process. Keep reading to learn how to make your tax progress stress-free!
Key Takeaways
- Parents should fully adopt a child – which means that the adoption status should be final.
- The maximum Adoption Credit of up to $15,950 per adopted child and the modified adjusted gross income limits for full credit eligibility in 2023.
- For 2023, the adoption tax credit is fully available in the amount of $15,950 if your modified adjusted gross income is equal to or less than $239,230. If your modified adjusted gross income is more than $239,230 but less than $279,230, you will receive a reduced tax credit.
- Adopted children with special needs can generally claim the full credit in the year of finalization without basing it on expenses.
Understanding Adoption Tax Credit
Adoption can be a costly process, but the federal government offers tax relief to offset some of the expenses through the adoption tax credit. This tax credit is designed to alleviate the financial burden of adoption and make it more accessible to prospective adoptive parents. Here’s what you need to know about adoption tax credit to understand how it works and how to qualify for it.
What is Adoption Tax Credit?
Adoption tax credit is a non-refundable tax credit that allows adoptive parents to claim eligible adoption expenses on their federal income tax returns. It helps offset the costs associated with adopting a child, such as adoption fees, court costs, home study fees, and travel expenses.
Eligibility Criteria for Adoption Tax Credit
To claim the adoption tax credit, you must meet certain eligibility criteria. The credit is available to taxpayers who have adopted a child under the age of 18 or a child with special needs. Additionally, the credit is available for domestic, international, and foster care adoptions – see IRS adoption credit.
Adoption Expenses That Qualify for Tax Credit
The adoption tax credit covers a wide range of qualified adoption expenses, including adoption fees, court costs, attorney fees, travel expenses, and other expenses directly related to the adoption process. However, expenses related to surrogacy or adoption of a spouse’s child do not qualify for the tax credit. Qualified adoption expenses paid prior to the year the adoption is finalized can be claimed as a credit in the tax year after the payment year. You can claim both the exclusion and the credit for expenses of adopting an eligible child.
Maximizing Adoption Tax Credit Benefits
To maximize the benefits of adoption tax credit, adoptive parents can utilize the following strategies:
- Timing Adoption Expenses: Consider the timing of adoption expenses to maximize tax credit benefits. For instance, if you have $10,000 in adoption expenses in a single year, you can claim the entire amount as a tax credit. However, if you have $5,000 in expenses in one year and $5,000 in the following year, you can only claim a tax credit for the expenses incurred in the year you claim the credit. Learn more about timing rules, or talk with our experts.
- Understanding Limitations and Phase-Out Thresholds: The adoption tax credit is subject to certain limitations and phase-out thresholds based on the taxpayer’s modified adjusted gross income (MAGI). For 2023, the adoption tax credit is fully available in the amount of $15,950 if your modified adjusted gross income is equal to or less than $239,230. If your modified adjusted gross income is more than $239,230 but less than $279,230, you will receive a reduced tax credit.
- Federal Adoption Tax Credit is non-refundable, meaning taxpayers can only use it if they have federal income tax liability. So if you don’t use its total value in the first year, you can carryover any remaining balance for up to five years.
- Special Needs – Exception of Adoption Tax Credit: If you adopt a child with special needs, you can get the maximum 2023 Adoption Credit for special needs in the year the adoption is finalized. These are the conditions they must meet:
- When an adoption effort began, the child had to be a citizen or resident of the United States or any of its territories.
- The state has determined that the child they are unable or shouldn’t be returned to their parent’s home.
- The state must determine that the child wouldn’t have been adopted without the assistance provided to the adoptive family.
Situations when Claiming The Credit
- Claiming an adoption tax credit will never be difficult when you know the rules. There are three specific cases to consider when assessing which is suitable for your situation:
- For those who adopt a child with special needs and do not base the request on expenses, you can claim the credit in the year of finalization.
- Parents who adopt internationally must wait until the year of finalization to claim the credit.
- Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment.
For example, Mr. Joe began adopting a U.S. child in 2020 and spent $5,000 that year on adoption expenses. In 2021 he had to pay another $6,000; in 2022, he spent $3,000 before the adoption was finalized. No cost was allowable in 2020; $5000 (from 2020) is acceptable in 2021; and $9000 ($6000+$3,000) in 2022 since it’s a finalized year.
Frequently Asked Questions:
What is the difference between a tax credit and a tax deduction?
A tax credit is generally preferable to a tax deduction because a credit is directly subtracted from the tax you owe, while a deduction only reduces the amount of taxable income.
What paperwork from my adoption is needed when I file for the tax credit?
- All Adoptions: Final Judgment of Adoption
- Adoptions from Foster Care: Subsidy Agreement declaring the child to have special needs according to the criteria of their state
- Domestic and Intercountry Adoptions: Home study, receipt of all qualifying expenses
Does the adoption tax credit just reduce my federal tax liability, or does it also reduce my state tax liability?
This information focuses on federal tax benefits. Many states do have an adoption tax benefit in addition to the federal tax credit. These state benefits can be claimed when filing state tax returns.
What is the income eligibility criteria for the adoption tax credit?
In 2023, families with a modified adjusted gross income below $239,230 can claim full credit. Those with incomes from $239,230 to $279,230 can claim partial credit, and those with incomes above $279,230 cannot claim the credit.
Contact our experts today and begin the journey with your new family!
Sources: adopthelp.com, irs.gov
