Answers to Six Common Questions About the Adoption Tax Credit
Taking advantage of tax credits can go a long way in reducing adoption expenses, even after you have your baby. Changes to the law allow the credit to adjust each year based on the federal government’s cost-of-living calculation for the year of adoption finalization. For adoptions finalized in 2018, the Adoption Tax Credit is $13,810 and for 2019 finalizations, the amount increases to $14,080.
Unlike a tax deduction, which lowers gross income, a tax credit is a dollar-for-dollar reduction in tax liability. Depending on the annual tax liability, you may receive back 100% of the taxes withheld from your paycheck. If the credit exceeds your annual tax liability, you can carry forward the credit balance for up to 5 years.
- How Do I Make Sure I Get Every Penny?
The secret to being reimbursed for the maximum you are eligible is good record keeping and holding onto expense receipts. While some adoptive parents will be fortunate enough to have all of their expenses occur during the calendar year of adoption finalization, most will have expenses that fall outside of the finalization year. When this happens, you run the risk of forgetting pre-finalization expenses from a year or more prior.
- When Can I Claim the Adoption Tax Credit?
The short answer is right now. Any adoption expenses incurred in 2017 and 2018 for adoptions that finalized in 2018 should be claimed on the 2018 tax return. In addition, adopting parents do not have to wait for finalization to access the credit when seeking to adopt a U.S.-born child. Qualifying adoption expenses can be claimed on tax returns the year after the expense is incurred: i.e. 2017 expenses are claimed in 2018 and 2018 expenses are claimed in 2019. This means that even if you do not complete the adoption process or your adoption takes longer than average, you can be reimbursed for qualifying expenses along the way.
For international adoption, the adoption tax credit can only be claimed after the adoption is finalized.
- What if I Was Previously Eligible for the Adoption Tax Credit and Did Not Claim it in the Year of Eligibility?
You may be eligible to file an amended return to claim the Adoption Tax Credit for previous years. Consult a qualified tax attorney, CPA or licensed tax professional to determine specific eligibility.
- What Expenses Qualify?
According to the IRS, any adoption expenses must be reasonable, necessary and directly related to the adoption of the child. Types of expenses may include adoption fees, court costs, attorney fees and travel. In addition, adoption expenses that are required by the state as a condition of your adoption, such as installing a fence around a pool, may qualify.
An expense may be a qualified adoption expense even if the expense is paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption effort may treat the fees as qualified adoption expenses.
- Does Everyone Get the Full Amount?
Most adopting parent will qualify for the full Adoption Tax Credit. However, there are income restrictions. If your adjusted gross income exceeds 207,140 in 2018 ($211,160 in 2019) you will receive a reduced tax credit. If your adjusted gross income exceeds $247,140 in 2018 ($251,160 in 2019), you will not be eligible for the tax credit.
Employer-provided adoption benefits can also affect the amount of tax credit available. The amount paid by the employer needs to be deducted from the total adoption cost first. The remaining balance will be the maximum tax credit that can be claimed.
- What About Adopting My Spouse’s or Domestic Partner’s Child?
While the adoption tax credit does not apply to expenses incurred to adopt the child of the taxpayer’s spouse. Unmarried domestic partners who live in states that allow co-parents or same-sex second parents to adopt their partner’s child may qualify for the credit.
To learn more about the Adoption Tax Credit visit the IRS website at https://www.irs.gov/taxtopics/tc607.
To file for the Adoption Tax Credit complete Form 8839.pdf, Qualified Adoption Expenses, using Form 8839 Instructions.
To learn more about covering the cost of adoption, watch the “Making Adoption Affordable – Ways to Pay for Adoption” Facebook Live recording with Adoption Attorney E. Parker Herring.
Starting Your Adoption Journey?
If you, or someone you know, is considering adoption and would like to learn more, call A Child’s Hope at 919-839-8800. You can also watch our placement day videos to hear recent adoptive parents share their adoption stories.
Pregnant? If you are a birth mother and are looking to place your child in a loving home, contact our Birth Mother’s hotline to speak with an adoption counselor today at 877-890-4673. To see placement day videos of A Child’s Hope families, click here.
For more information on the legalities involved with adoption in North Carolina, visit parkerherringlawgroup.com.
The information contained in this article is for general knowledge purposes only. Individuals interested in claiming any tax credit should consult a qualified tax professional to determine specific eligibility and amounts.