The Adoption Tax Credit is one of the most misunderstood aspects of adoption. Families have a difficult time understanding how it applies to them and we consistently receive more questions about the Adoption Tax Credit than any other topic related to funding adoption. Although it’s not refundable, the Adoption Tax Credit still works and provides much needed financial assistance to a lot of families each year.
What Is The Adoption Tax Credit?
The Federal Adoption Tax Credit helps offset the high cost of adoption and allows more families to afford adoption and provide children with permanent families. Although it was established in 1997, the Adoption Tax Credit was not made permanent until the American Taxpayer Relief Act of 2012 was signed into law.
Who Is Eligible To Claim The Adoption Tax Credit?
The credit applies to all types of adoption (except step-parent adoption), including:
- International adoptions
- Domestic agency and private adoptions
- Public foster care adoptions
If your family adopts internationally, once the adoption is legally finalized, either in the U.S. or in the child’s home country, you can claim your qualified adoption expenses, up to the maximum.
Families who adopt children with special needs can claim the maximum credit regardless of whether they have qualified adoption expenses or not. A special needs adoption is one in which the state or county child welfare agency has determined that the child is not likely to be adopted unless the government provides assistance to the adoptive family. The special needs determination is almost exclusively for foster children and many foster children are considered special needs.
If you’re not a CPA, you’re probably unfamiliar with the requirements of the Federal Adoption Tax Credit and the process can be confusing. During the 2012 filing season, 69% of all adoption tax credit claims were selected for audit.
Whether you’re working with a tax professional or filing on your own, be sure that you understand how the Adoption Tax Credit applies to your adoption and follow these 10 steps to minimize the likelihood of an audit when claiming the Adoption Tax Credit.
Adoption Tax Credit FAQs
What are qualified adoption expenses?
According to the IRS, “Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.”
Qualified adoption expenses include:
- Adoption fees
- Attorney fees
- Court costs
- Travel expenses (including meals and lodging) while away from home
- Re-adoption expenses relating to the adoption of a foreign child
- Any expenses directly related and necessary for the adoption
Qualified adoption expenses do not include expenses:
- For which you received funds under any state, local, or federal program
- That violate state or federal law
- For carrying out a surrogate parenting arrangement
- For the adoption of your spouse’s child (step-parent adoptions are excluded)
- Paid or reimbursed by your employer or any other person or organization
- Allowed as a credit or deduction under any other provision of federal income tax law
What is the maximum credit amount?
For 2017, the maximum adoption credit and exclusion is $13,570 per child. The amount changes each year to adjust for inflation. The credit will begin to phase out for families with modified adjusted gross incomes above $203,540 and the credit will go away completely for those with incomes around $243,540.
Since the credit is per child, the maximum you claim depends on the number of children you adopt. If you adopt two children in 2017, your maximum is $13,570 x 2 or $27,140. If you adopt four children, the maximum is $13,570 x 4 or $54,280.
Adoption Tax Credit Amounts
2017: $13,570 non-refundable
2016: $13,460 non-refundable
2015: $13,400 non-refundable
2014: $13,190 non-refundable
2013: $12,970 non-refundable
2012: $12,650 non-refundable
*The credit was only refundable in 2010 and 2011. A refundable credit is one that a person can receive regardless of their tax liability. It is viewed as a payment so the parents can receive a refund larger than any taxes they have paid in during the year.
Adoption Tax Credit Income Phase-out Ranges
2017: $203,540 – $243,540
2016: $201,920 – $241,920
2015: $201,010 – $241,010
2014: $197,880 – $237,880
2013: $194,580 – $234,580
2012: $189,710 – $229,710
Are there individual state tax deductions?
You may be eligible for deductions within your state of residence. Be sure to check with your tax advisor for details. For additional information, contact your State Adoption Specialist at The Child Welfare Information Gateway.
What does it mean that the credit is not refundable?
A non-refundable credit is one in which taxpayers receive a refund of federal income taxes, but only up to the amount of taxes they otherwise had due. In one year, taxpayers can use as much of the adoption tax credit as the full amount of their federal income tax liability, which is the amount on line 46 of the Form 1040 less certain other credits (such as the Child Tax Credit). Even those who normally get a refund may still have tax liability; with the adoption tax credit the taxpayer could get a larger refund.
Families who have lower or moderate incomes typically have no tax liability and will not benefit from a non-refundable credit. We still encourage families who don’t think they have a tax liability to file for the credit (Form 8839), in case families’ tax liabilities change in future years.
In recent years, there has been a major political push to make the credit permanently refundable. However, no legislation has been passed and the Adoption Tax Credit is not refundable in 2018.
Here is a very simple example of how the Adoption Tax Credit works. A family has $5,000 in federal income taxes withheld from their paychecks during the year. When they do their taxes, they look at the tax tables and based on their adjusted gross income, their federal income taxes are $1,000 (this is their tax liability). If there were no adoption credit, they would be due a refund of $4,000. The family had qualified adoption expenses of $8,000. Because of the adoption credit, they would receive an additional $1,000 refund for that tax year (reducing their tax liability to zero), meaning that they get the full $5,000 that was withheld back rather than just the $4,000 they would have gotten without the non-refundable credit.
They can carry the remaining $7,000 ($8,000 in expenses minus the $1,000 they received) forward to future years and receive additional refunds depending on their tax liability in future years. (See more on the carry forward below).
How much of the credit can parent claim?
For other adoptions (other than step-parent adoptions, which are not eligible for the credit at all), parents can claim the credit for qualified adoption expenses up to the maximum. So if a family has $5,000 in expenses for a private, non-special needs adoption, they can claim only that $5,000 not the maximum. Families who have expenses above the maximum can only claim the maximum. So if a family has expenses of $30,000 for a 2013 adoption of two children, they will be able to claim only $25,940 ($12,970 per child), as long as their income is below the phase-out limits listed above.
In all cases, how much a parent will actually receive in a given year depends on their tax liability.
What is a special needs adoption?
A special needs adoption is one in which the state or county child welfare agency has determined that the child is not likely to be adopted unless the government provides assistance to the adoptive family. The special needs determination is almost exclusively for foster children, and a significant majority of foster children are considered special needs.
Children who are determined to be special needs are typically older, are part of sibling groups that will be placed together with one family, or have physical, emotional, or mental disabilities. All children adopted from foster care with an adoption assistance agreement (also referred to as adoption subsidy agreement) from their state or county are considered special needs for purposes of the tax credit.
Just because a child is disabled does not mean the child is special needs under the tax credit. No child adopted internationally is considered special needs for the adoption tax credit. Not even every child adopted from foster care is considered special needs (about 10% of children adopted from care do not receive adoption assistance support). Those who do not have an adoption assistance agreement are not special needs.
Simply meeting the state’s definition of special needs is not sufficient. The state or county child welfare agency must have made an active determination that the child is considered special needs, and an adoption assistance agreement must be in place. (For example, if a parent privately adopts three siblings from a family member with no child welfare involvement, those children are not considered special needs even though a sibling group of three adopted from foster care would meet the special needs definition.)
Is the credit a deduction?
No, the credit is not a deduction. The credit is a dollar for dollar reduction in the amount of federal taxes owed (tax liability) for the year.
What is tax liability?
It is the amount of federal income tax that you owe the IRS for the year. If you did your taxes manually, it’s the amount you look up in the tax table based on your adjusted gross income.
You can get a refund and still have tax liability; a refund simply means you paid in more than you owe. It’s not really this simple, but the general idea is that if your employer withholds $5,000 in federal income tax during the year and you get a refund of $3,000, your tax liability was the $2,000 that the IRS kept in federal income taxes.
Can the credit be carried forward if I don’t have enough tax liability the first year I claim it?
Yes, taxpayers have a total of six years to use the credit—the year they first are eligible to claim and the next five years.
Adoptive families who file taxes should include a Form 8839 to establish the adoption tax credit even if they do not believe they will receive a refund. Families may have tax liability in future years and establishing the credit would save them from having to go back and amend taxes once they were able to benefit. In addition, if the credit does become refundable again in the future, the remainder will be refunded to you.
I already claimed the credit for an earlier adoption. Does the new law affect me?
No. It is a one-time credit per child and if you have received it already for an earlier adoption, you do not benefit further. If you adopt another child, you are definitely eligible to claim another adoption tax credit for that child (or children).
If you never filed for the credit, but adopted in 2011 or more recently, you may still be able to benefit depending on your personal tax situation. For more information, visit the North American Council on Adoptable Children.
Does a parent who adopted a child with special needs still have to have tax liability?
Yes, the only difference for special needs adoptions is that parents can claim the maximum credit regardless of whether they had any adoption expenses or not. The credit is still non-refundable for special needs adoptions.
When can I claim the credit?
For special needs or international adoptions, you cannot claim the adoption credit until you file taxes for the year of finalization. So, if you received placement of a child in 2012 but the adoption was not finalized until 2013, you cannot claim the credit until you file your 2013 taxes.
For U.S. private adoptions with qualified adoption expenses, you can claim the credit before finalization (or for a failed adoption) but you must wait one year after you incur the expenses. So, if you had expenses for an adoption in 2011 that has not or will not finalize, you must claim them with your 2012 taxes.
Can I claim the credit for a failed adoption?
Yes if it is a U.S. adoption and you had qualified adoption expenses. It is treated as a non-finalized adoption, and you must wait one year after you incur the expenses. So, if you had expenses for an adoption in 2011 that has not or will not finalize, you must claim them with your 2012 taxes filed in early 2013.
You cannot claim any credit for a failed international adoption.
What is the exclusion for employer-provided adoption benefits?
The law also allows adoptive parents whose employers offer an approved adoption assistance program to exclude any reimbursed expenses from their taxable income. Parents cannot claim the expenses for the exclusion and the credit. For example, a family spends $17,000 on their adoption, and the employer reimburses $10,000 through an approved adoption assistance program. The family can exclude the $10,000 from their taxable income, and claim only the remaining $7,000 for the adoption credit.
Those who adopt children with special needs can use the maximum amount of the exclusion ($12,970 for 2013) regardless of any expenses or reimbursement as long as their employer offers a qualified adoption assistance program.
Please review the instructions for Form 8839 for more information on the exclusion.
If I fundraise for my adoption, is the money I receive from supporters considered taxable income?
As a general rule, fundraised monies are not considered taxable income when:
- A donation is a made to a 501(c)(3) tax exempt charity.
- Gifts are given by an individual to an individual when no business or potential profit motive is evident. A few examples include a wedding, adoption, and medical illness. If you host a spaghetti dinner and receive donations, you would not claim the money as income. Money given as a gift is deducted and thus not eligible as a qualified expense for the purposes of the Adoption Tax Credit. In other words, you can’t double dip and apply the gift toward your adoption and also claim those expenses.
However, if you sell a service or product such as jewelry, t-shirts, or Christmas ornaments, you would claim the income and expenses on a Schedule C.
If you decide to fundraise for your adoption, we recommend using an online fundraising site (such as Pure Charity) that is a registered 501(c)(3) and disperses funds directly to the service provider (i.e. an adoption agency). Your supporters receive a tax receipt and the funds are not considered taxable income.
If I apply for the Adoption Tax Credit, am I likely to be audited?
69% of all adoption tax credit claims in the 2012 filing season were selected for audit. While you shouldn’t necessarily expect your tax return will be audited, be prepared for it. Track your adoption expenses and keep all receipts from the day your adoption journey begins.
Adoption Tax Credit Resources
Bill’s Tax Service has certified Adoption Tax Credit specialists that can help you regardless of what state you live in. The owners have personally fostered and adopted children of their own. Bill’s Tax Service is passionate about helping families make sense of the Adoption Tax Credit and navigate through the requirements and paperwork.
North American Council on Adoptable Children (NACAC) includes an assortment of information about the Adoption Tax Credit and how to claim it.
AdoptionTaxCredit.org provides information about the Adoption Tax Credit and a long list of FAQs.
Top 10 Facts About Adoption Benefits is a quick cheat sheet to help you better understand the Federal Adoption Tax Credit.
Topic 607 – Adoption Credit and Adoption Assistance Programs gives examples of tax benefits for adoption when receiving employer-provided adoption assistance.
IRS Form 8839 and the accompanying instructions.
This information is intended to provide you with an overview of the Adoption Tax Credit and how it may apply to you. It is not intended to be a substitute for professional financial advice. Be sure to consult your tax advisor.