Have You Adopted a Child? Find Out How Adoption Affects Your Taxes

Make sure you qualify to receive the Adoption Tax Credit to save money during Tax Season

Have You Adopted a Child? Find Out How Adoption Affects Your Taxes
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March 9, 2017

The Adoption Tax Credit is meant to offset some of the costs involved in the long, complicated adoption process. Chances are that if you have adopted a child, you had to spend a great deal of money to do it.

Adoptive parents pay an average of $30,000 in the process and associated fees. Fortunately, most could receive up to $13,450 in credit for every qualifying adopted child if they claim the Adoption Tax Credit.

There are specific requirements that adoptive parents have to meet in order to be eligible to claim the credit. In addition, there are other tax breaks that they may be eligible for, credits based on factors like adopting a child with special needs or an adoption that was ultimately unsuccessful.

Claiming the Credit

There are two requirements for claiming the Adoption Tax Credit: qualifying and filling out Form 8839, where you report all of your qualified and itemized expenses for the tax year in question.

The maximum amount that you can receive per eligible child is $13,450. Children have to be under the legal age of 18 to be eligible, though they can be older if they are unable to care for themselves physically or mentally.

The only expenses that you can claim toward the credit are those directly related to legally adopting a child, such as court and attorney's fees, traveling expenses, and home study costs.

You may qualify as long as you did not receive reimbursement from any other parties, such as an employer or state-governed agency.

Although most adoptive parents qualify, some do not due to the amount of money spent in the adoption process. You can claim the maximum amount only if you spent that amount in qualifying expenses. This is because the amount of the credit you will receive will be equal to the amount you spent up to the maximum amount. If you spent less than the maximum, you will only receive the same amount that you spent.

If your modified adjusted gross income is more than $201,920, the amount of your credit will be lower. You will not be able to receive the credit if that income is $241,920 or higher.

Remember that the credit is non-refundable, which means that taxpayers can receive it only to reduce their tax liability. It cannot be received in the form of a refund.

Claiming the Credit for Special Needs

If the child you adopted meets the federal government's definition of a child with "special needs," you are allowed to claim the maximum amount of the credit regardless of what you spent during the adoption process.

In this instance, the child has to meet all the following requirements:

  • Must be a citizen or resident of the U.S.
  • Must not or cannot be returned to the home of the birth parents
  • Would likely never have been adopted without some form of financial assistance

Remember that the Adoption Credit can only be applied once. It applies only for the tax year in which you went through the adoption process and experienced the related expenses. It cannot be claimed for any year after the adoption because the child is considered your dependent from that point onward.

Claiming the Credit for an Unsuccessful Adoption

Unfortunately, there are times when adoptive parents are unsuccessful in adopting a child. If this applies to you, you can claim the expenses incurred during the process up to the maximum amount.

Claiming Benefits Provided by an Employer

You may be qualified for certain adoption benefits from your employer when you file your taxes after adopting a child. These are benefits that your employer pays either to you or to a third party on your behalf under IRS tax code.

These amounts can be excluded from your taxable income up to the maximum amount of the credit. These expenses can be used only to qualify for the exclusion, not for the credit. However, if you are eligible for the maximum amount of both, you are allowed to claim them.

Filing a Return for the Adoption Credit

Although most people now file their returns electronically, adoptive parents planning to claim the Adoption Tax Credit still have to file a paper return.

The main reason is because you will have to submit a formal adoption certificate signed by a judge. If you file under special needs criteria, you will have to submit documentation issued by the state and/or county to that effect.

Keep in mind that Form 8839 is not accepted electronically and that filing the necessary forms and certificates through the mail may delay your refund.