What's Up With the Adoption Tax Credit?

If you adopted someone or started the adoption process in the year 2023, take a moment to locate your adoption papers. This is because you might qualify for an Adoption Tax Credit, which can be applied to international, domestic, private, and public foster care adoption.

The average cost of private agency adoption can be anywhere from $30,000 to $60,000 if not more, according to the Child Welfare Information Gateway. While an independent adoption can be slightly less costly, with this type of adoption ranging from $25,000 to $45,000, the process still requires you to work with an attorney. Additionally, if the adoption involves a newborn baby, then you might also have to cover the birth mother’s expenses, including medical.

How can you claim the Adoption Tax Credit when filing your taxes?

• As of 2023, the most that you can claim through this adoption credit is $15,950 per child, as long as each child is eligible.
• Keep in mind that there are certain income limitations that can affect the amount of money you receive by applying this tax credit. For instance, if your modified adjusted gross income is equal to or less than a total of $239,230, then you are allowed to claim the full amount of this tax credit.
• On the other hand, if your modified adjusted gross income is greater than $239,230 yet less than $279,230, then you can still claim this tax credit, although the amount that you receive will be reduced.
• For anyone thinking about claiming this tax credit while making more than $279,230 annually, please note that you are not eligible for this tax credit given how much money you make.

These figures tend to change slightly from one year to the next, so check the exact figures pertaining to this tax credit to ensure you understand each specific year’s requirements for eligibility.

How is this tax credit applied?
The Adoption Tax Credit can only be used to reimburse adoptive parents for expenses that are related to the adoption process. This includes court fees as well as paying attorneys, reimbursing agencies, and affording travel expenses like the costs of meals and lodging.

Adoption can easily turn into a multiyear process, but luckily the Adoption Tax Credit takes this into account. When it comes to domestic adoptions, you can claim the Adoption Tax Credit and apply it to the tax year during which you incurred the associated expenses. For those of you who are adopting internationally, you are allowed to claim the tax credit within the year in which the adoption is finalized.

Other things to note about the Adoption Tax Credit

• When pursuing the Adoption Tax Credit, make sure you complete Form 8839, Qualified Adoption Expenses. You can find the form online via the official IRS website. After filling it out, make sure you submit it alongside Form 1040. Feel free to e-file the tax form along with your return.
• In order for a child to be eligible for the tax credit, he or she must be younger than 18 years old. If the individual is older than 18, then they are only eligible if they cannot physically care for themselves.
• Keep in mind that this tax credit is nonrefundable, which means the amount that you claim can only be applied to the taxes that you owe for that specific year.
• Even if you are not responsible for any federal income taxes, you should opt in to carry the credit forward. That way, it can help you out in the future in the event that your tax liability increases someday.
• If you have a registered domestic partner, they might be able to pay for the adoption expenses. Also, if you live in a state that allows same-sex second parents or co-parents to adopt their partner’s child, then you can also consider those costs as qualified expenses.
• Expenses that are accrued prior to the adoptive child being identified can still qualify for the tax credit. For instance, fees taken on for use in the future can be claimed as qualified adoption expenses.

Which paperwork do you need?
If you are not able to obtain the Social Security number of the adoptive child—or you don’t have the SSN for another reason—then you can acquire an adoption taxpayer identification number (ATIN) from the IRS. This can serve as a temporary ID when filling out your federal tax return.

However, as a temporary ID, the ATIN will expire within two years of receiving it. If the adoption is not finalized prior to the expiration date of the ATIN, then you can apply for an extension of the ATIN. For additional information that can help you navigate the rules of the IRS, refer to the following documents, both of which can be ordered via IRS.gov/OrderForms or by calling 1-800-TAX-FORM (829-3676):

• Publication 501, Dependents, Standard Deductions and Filing Information.
• Publication 503, Child and Dependent Care Expenses.

Though adoption is a wonderful process that is worth the effort it takes, it can also be very stressful and expensive. While many families are eligible for relief through the Adoption Tax Credit, the details can be complex, and there are more complicated details worth considering.
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Please note that this is only a summary of the Adoption Tax Credit. For more detailed explanations and personalized advice, consult with a tax professional to see how you can maximize the credit based on your financial situation.