Here is a comprehensive overview of the adoption tax credit, how to qualify, and how to keep track of all of your relevant adoption expenses.

Adoption Tax Credit

If you have done any research regarding adoption, I am sure you are concerned about the cost of adoption. It should come as no surprise that adoption can cost anywhere from nothing up to $50,000. I urge you not to be scared by the price. It may seem like a lot of money upfront, but I can tell you from experience that it is worth every penny. There are several ways to save for an adoption and ways to fundraise funds to help cover the costs of adoption.  Also, once your adoption is completed, you may be able to benefit from the adoption tax credit. But what is the adoption tax credit? I will attempt to explain the adoption tax credit in this article. I want to advise you, however, that I am not a tax professional and please do not consider this legal advice. This article is written solely from my own research and experience. I encourage you to talk with a tax professional for any additional questions or clarifications you may have. You can also check out the Internal Revenue Service website for more information at https://www.irs.gov/

What:

The adoption tax credit is a non-refundable tax credit. This means it is limited to your tax liability for the year. It is important to know that this can carry over until you exceed the maximum dollar amount. For the tax year 2018, the adoption tax credit is $13,810. This amount has been changing every tax year. Make sure to stay up to date on the amount. I point this out because you might start the adoption process in 2018 but your adoption may not be finalized until the following year or years down the road. I know personally, we started the adoption process in 2008 and we did not finalize our first adoption until 2015. Please note that we waited much longer than your “average” wait before being matched with our son’s birth mother. Read on for what expenses are covered with the adoption tax credit, how to receive the adoption tax credit, and how the tax credit affects your income. 

Expenses: 

Qualifying adoption expenses that are included in the adoption tax credit include the following: adoption fees, agency fees, home study fees, court costs, attorney fees, traveling expenses (including meals and lodging), and other expenses that are directly related to the legal adoption of an eligible child. These expenses can be incurred before you are matched with an eligible child or know what child you are adopting. Meaning, if you have paid an agency fee or home study fee before you have been matched with a child or know which child you will be adopting, those fees will be considered a qualified expense.  To clarify, an eligible child is a child under the age of 18 or is physically or mentally incapable of caring for themselves. Expenses incurred during a domestic, international, and foster care adoption qualify. It should also be noted that any expenses incurred to cover the cost of a stepparent adoption do not qualify. Expenses incurred by a domestic partner who lives in a state that allows same-sex partners to adopt his or her partner’s child will qualify as long as those expenses otherwise would be qualified adoption expenses. Be sure to talk with your tax professional for any clarification. 

Limitations:

The adoption tax credit is subject to income limitations. The limitation is based on your modified adjusted gross income. This limitation is subject to a phaseout, which could result in the tax credit being reduced or eliminated. For the tax year 2018, the phaseout begins with a modified adjusted gross income of $207,140 and ends at $274,140.  That is, if your modified adjusted gross income is below $207,140 for the tax year 2018, you would not be affected by the phaseout. However, if your modified adjusted gross income is $247,140 or more, your tax credit will be zero. If you paid adoption expenses in a particular year, you must reduce the dollar limit claimed for the previous year for the same adoption effort. That is, if you claimed a credit in the tax year 2017 and paid additional adoption expenses in 2018 then you must deduct what you paid in 2017 from the expenses claimed in 2018. For the sake of simple math, if you claimed $2,000 in 2017 and incurred an additional $10,000 in 2018, the year the adoption became finalized, then you would be able to claim $8,000 for the tax year 2018 ($10,000 – $2,000 already claimed = $8,000). 

Calculated: 

It is important to note that qualified adoption expenses paid and claimed in an unsuccessful domestic adoption will also qualify as adoption expenses for purposes of claiming the adoption tax credit. Again, for the sake of simple math, let’s say you spent $5,000 associated with an unsuccessful adoption in 2017. You then incurred another $10,000 of adoption expenses in 2018. Again, the adoption tax credit limit is $13,810. You already claimed $5,000 in 2017, so for the tax year 2018, you would be able to claim the remaining $8,810 ($13,810 – $5,000 already claimed = $8,810).

In order to calculate your qualified adoption expenses, you also have to take into consideration any amount your employer reimburses you. Some companies provide adoption assistance. Make sure you check with your human resources department to see if your employer offers any adoption assistance. If they do, you can deduct the amount they reimburse you from your gross income. You also must deduct it from the allowable tax credit. For example, perhaps your employer reimburses you a flat $3,000 for adoption assistance. Then, you have incurred $13,810 in qualified adoption expenses. You may deduct the $3,000 from your gross income and still be able to claim $10,810 in qualified adoption expenses. That is $13,810 in total qualified adoption expenses and you remove the $3,000 employer credit (which you can reduce from your gross income) which leaves you with a remaining $10,810 to claim as an adoption tax credit. 

Lastly, it is important to note that if your employer reimburses you for the maximum exclusion amount ($13,810), you may deduct both the exclusion and the tax credit, as long as your adoption expenses exceed the total of both ($27,620). However, anything above and beyond the total of the two cannot be claimed for the exclusion or the adoption tax credit. 

Special Needs: 

If you have finalized an adoption of a child that has been determined to have special needs (the child received adoption assistance or adoption subsidy benefits), you can claim the maximum adoption credit ($13,810 for 2018) whether you had any expenses or not. For purposes of claiming the adoption tax credit as a special needs adoption, the child must meet all three of the following criteria: the child was a citizen or resident of the United States; a state has determined that the child cannot be returned this his/her biological parent’s home; and the state has determined the child will not be adopted unless assistance is provided to the adoptive parents. For the purposes of the adoption tax credit, a child having a disability does not mean the child will qualify for the special needs adoption as determined by the adoption tax credit. Specifically, not every child adopted from the foster care system will be considered special needs for the sake of the adoption tax credit.

When: 

When you can claim the adoption tax credit depends on a few things, when the expenses are paid, whether your adoption is a domestic adoption or an international adoption, and when, if ever, the adoption was finalized. Generally, they are similar in how the tax credit is applied, however, the timing is a little different. In a domestic U.S. adoption, qualified adoption expenses that are incurred before the adoption becomes finalized are claimed as a credit for the tax year following the year of payment. That is, if you pay adoption-related expenses in 2017, then they are claimed in the tax year 2018. This also applies to an adoption that was never finalized. For an international adoption, adoption expenses paid before and during the year are claimed as credits for the year the adoption becomes final. That is, expenses incurred in 2017 and 2018, will be claimed in the year the adoption becomes final, 2018. 

It is important to note that the adoption tax credit is a dollar for dollar reduction in your tax liability. That is, if your tax liability is less than the allowed credit $13,810, the amount may be carried over to the following year until the full amount is exhausted. I can tell you in our experience, with our first adoption, it took us two years to fully exhaust the tax credit. We also incurred adoption expenses for approximately four years before we were able to claim the adoption tax credit. We also had a failed adoption in 2016 that we were able to claim most of in 2017. Again, keep track of all expenses paid, whether the adoption is completed or not. We started keeping track of our expenses (in an Excel spreadsheet) the first day we started the adoption process and kept track of them until the adoption was finalized. 

Forms:

In order to claim the adoption tax credit or exclusion, you must complete Form 8839 and attach with your tax return. If you are having an accountant prepare your tax returns, he/she will complete this for you. However, you will be responsible for providing him/her with your qualified adoption expenses. Be sure to keep track of all expenses paid. We kept an Excel spreadsheet with all of the expenses we paid and kept an Excel spreadsheet with all miles traveled in relation to our adoption. We did a lot of traveling with our first adoption, so we had several trips we kept track of. We also kept all receipts in relation to any expenses we made in relation to the adoption, this included meals while we were traveling. I suggest you do the same so you are not scrambling at the last minute to put together your expenses.  Make sure you talk with a tax professional to discuss exactly what will be covered in relation to the expenses that you pay. For example, if you were to buy a gift for your expectant birth mother, that would not count as a qualified adoption expense. However, if you dine out while traveling to pick up your child, that would count as a qualified adoption expense. Also, any mileage you incurred to pick up your child or other related travel may be considered a qualifying expense. The IRS indicates you no longer are required to attach the adoption documentation with your tax return, but you are to keep a copy of your records. 

I, again, urge you to contact a tax professional. We always did our own taxes, until we started the adoption process. The amount of information is overwhelming and we wanted to be sure to maximize our tax return, in order to offset some of the cost of adopting. I will tell you that the adoption tax credit covered almost all of our adoption expenses. We had to pay them in advance but received the money back in the form of a tax refund once we were able to claim the adoption tax credit. It is definitely worth talking to a professional about. Again, this article was meant to be a quick overview of what the adoption tax credit is and how to claim the adoption tax credit. Please do not consider this accounting advice, rather my personal experience and research regarding the adoption tax credit. I wish you the best of luck with your adoption and hope you are able to take advantage of the adoption tax credit. 

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Jessica Heesch

Jessica Heesch

Jessica Heesch is an avid runner and fitness guru by choice, occasional writer by coincidence, loved by an amazing husband, and mother to an incredible boy, Jackson, by the gift of adoption.