How Does the Adoption Tax Credit Work?
If you adopted a child in the last year — or even simply started the adoption qualification process — you may be able to claim the adoption tax credit. The credit may be claimed once per adopted child and is designed to incentivize adoptions by helping to either fully or partially offset some of the initial costs involved in the adoption process.
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What Expenses Qualify
You can apply for the adoption tax credit by filling out IRS form 8839. There are multiple different adoption-related expenses that qualify for the adoption tax credit. These include:
- Legal fees: Costs incurred by time spent in court as well as attorney fees.
- Traveling expenses: Including the actual costs of transportation and additional expenses, such as the cost of food and lodging when away from home.
- Qualified adoption fees: Reasonable and necessary costs incurred during the process, Including early costs, such as a home study, even if the adoptive child has not yet been identified.
- Any other adoption-related expenses: Expenses that must be directly related to an eligible adoption.
If these conditions are met, you are eligible to claim the credit of up to $14,080 for 2019.
In addition, if the child is considered special needs, you may automatically claim the entire credit — regardless of your own costs — in the year that the adoption is finalized. However, any expenses already claimed on previous returns will be deducted from the total.
If you’re adopting your spouse’s child, you can’t claim those expenses under the adoption tax credit.
As with most tax credits, income limitations are imposed on the adoption tax credit. This means your income must be below a certain threshold to qualify for the credit. This number is calculated by using the taxpayer’s modified adjusted gross income (MAGI). This is your after-tax income with income you earned from tax-exempt interest and tax deductions added in for the total.
In 2019 the following income limitations apply:
- If your MAGI is under $211,160 you can claim the entire credit.
- If your MAGI is between $211,160 and $251,160 you can claim part of the credit.
- If your MAGI is above $251,160 you can no longer claim the credit.
Other Qualifications and Limitations
As far as timing qualifications are concerned, these are largely dependent on a number of factors.
For example, in the case of a domestic adoption — meaning the child was a U.S. citizen before the process began — all qualified expenses before the adoption is finalized may be claimed the year that you incur them. This is true even if an adoption is never finalized and a child is never formally adopted. For instance, if a couple pays to have a home evaluation and a child is never identified for them, they may still claim the qualified cost.
All qualified expenses involved in a foreign adoption, on the other hand, while they still may be claimed, cannot be claimed until after the adoption is finalized.
You can find more information about precisely when the credit can be claimed on the IRS website under the section “Timing rules: For what tax year can you claim the credit?”
Is the Adoption Credit Refundable?
A deduction is a quantity that can be deducted from a taxpayer’s taxable income. A credit, like the adoption tax credit, is a sum that is directly negated from taxes owed by the individual.
Some credits are refundable, meaning that if the total amount of taxes owed dips below $0, the taxpayer will actually get money back in the form of a tax refund. The adoption tax credit, however, is nonrefundable. Once your total taxes owed reaches $0, you will not be able to claim the rest of the credit as part of your tax refund.
Does the Adoption Credit Carry Forward?
Even if you do not have any tax liability in the year that you adopt a child, it’s still a good idea to claim the adoption tax credit, as you may be able to use it for up to five years in the future.
For instance, if you owe $0 in taxes in 2019 and you’re able to claim the entire $14,080 adoption tax credit, you can carry that total forward for up to five more tax returns. You can apply it to any of the returns during this period in order to decrease your liability for that year.
What Are Some Similar Resources?
If you’re able to claim the adoption tax credit, you may want to investigate your eligibility for these tax credits and deductions as well:
- Child Tax Credit: This credit is for up to $2,000 per child, although only $1,400 is eligible as a refund. The credit does supersede the adoption tax credit and is applied to the tax liability first.
- Mortgage Interest Deduction: This tax deduction is available for any qualifying taxpayers who own a property and may have paid interest on a mortgage during the past tax cycle.
- Child and Dependent Care Credit: This credit may be claimed by a taxpayer who had expenses for the care of a child or another qualified individual because the taxpayer was either working or looking for employment.
If you’re adopting, there’s a good chance you have other children, childcare costs, or a mortgage payment. If this is the case, looking into these credits and deductions may be well worth your time.
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This post was updated December 4, 2019. It was originally published December 4, 2019.