How to Claim the Adoption Tax Credit


Becoming a parent through adoption comes with significant financial responsibilities as well as joy. But there are some tax breaks to be had.“Becoming a parent through adoption comes with significant financial responsibilities as well as joy. But there are some tax breaks to be had.©bbevren/iStock

Each year, about 135,000 children are adopted within the U.S., primarily through the foster care system [source: PBS]. In addition, in 2013 alone, more than 7,000 children were adopted from other countries [source: Bureau of Consular Affairs].

Bringing an adoptive child into your home can be enormously rewarding — and expensive. One way to offset some of the costs is applying for the Adoption Tax Credit, which offers a credit on federal income taxes for qualified adoption expenses.

For tax year 2014, the maximum credit was $13,190, even if your expenses were more. If you spent less on approved expenditures, you’ll likely receive the credit for only what you spent — not the full deduction. And if your modified adjusted gross income is around $200,000 or above, your credit may be reduced or eliminated altogether.

However, if you adopt a child with special needs — as determined by a state agency — you qualify for 100 percent of the credit, even if the adoption was free. For the tax credit, special needs children must be citizens or residents of the U.S. who aren’t allowed to live with their parents. In addition, they are children that are considered difficult to place. Typical placement problems involve ethnicity, race, age or serious disabilities.

For all adoptions, only qualifying expenses can be considered for the credit. These are essential expenditures for the adoption, such as court costs, lawyer fees and traveling costs. If your employer or a government program paid for or reimbursed you for any of these fees, you cannot include them toward your credit. And stepchildren or a child adopted from a surrogate mother are not eligible for the adoption credit. If the adoption is domestic, the credit can be applied even if the adoption falls through. However, only finalized foreign adoptions are eligible.

One drawback to the Adoption Tax Credit is that it is non-refundable, which means it’s applied only to reduce your tax liability; if you actually owe fewer taxes than your tax credit allows, you can’t get a refund for the additional amount. However, you haven’t really lost anything. You can apply the remaining credit on taxes during the next five years.

The IRS has specific timelines for taking the tax credit. For a foreign adoption, the schedule is simple: The tax credit is applied the year the adoption is final, even if you had adoption-related expenses in previous years. If you have related costs in the future, they are taken the year you paid them. The rules are the same for domestic adoptions, except for prior expenses. Those can be applied to your taxes the year after you made the payment, even if the adoption is not yet complete.

If you meet the tax credit criteria, the application for credit is relatively simple. You must complete and submit the two-page IRS Form 8839, Qualified Adoption Expenses, and include it with a 1040 or 1040NR tax return. As of 2013, you can even e-file. You provide information such as the name of your adopted child, any special needs, country of origin, and an identifying number, such as a Social Security number. List your modified gross income, the amount of qualified adoption expenses for the year and any future credits you might be owed. You also have to mention any adoption benefits from your employer. With this paperwork, you’ve really scored big: In addition to your new family member, you also have a significant tax credit.

Lots More Information

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  • How the Child Tax Credit Works
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  • Bureau of Consular Affairs. "Intercountry Adoption Statistics." (Oct. 29, 2014)
  • Internal Revenue Service. "Adoption Benefits FAQs." February 7, 2014. (Oct. 29, 2014)
  • Internal Revenue Service. "Form 8839 Qualified Adoption Expenses." 2014. (Oct. 29, 2014)
  • Internal Revenue Service. "Instructions for Form 8839." 2013. (Oct. 29, 2014)
  • Internal Revenue Service. "Topic 607 – Adoption Credit and Adoption Assistance Programs." Aug. 11, 2014. (Oct. 29, 2014)
  • PBS. "Facts About Adoption." Sept. 7, 2010. (Oct. 29, 2014)

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