Congratulations on your new family member!
As you may know, there are tax breaks for having a child. The IRS makes no separation between biological and adopted children, however, there is an Adoption Tax Credit, with some additional deductions specifically for you adoptive parents.
The Adoption Tax Credit: What Are The Rules?
First, the Adoption Tax Credit doesn’t apply to adopting the child of your spouse. But non-married people, in states that allow domestic partners to adopt their partner’s children, do qualify.
The credit applies to legal adoptions of children under 18, or children who are mentally or physically unable to take care of themselves.
You can only claim credits on “Qualified Adoption Expenses”. What are Qualified Adoption Expenses? These are fees that are listed as:
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- Necessary and reasonable for the adoption to happen
- Court and lawyer fees related to the adoption
- Traveling expenses related to the adoption
- Any other expense directly related to the purpose of the adoption, even if you haven’t been matched with a child yet. (Example: You pay for your home study at the very beginning of your attempts to adopt)
No Refunds Allowed
If your Adoption Tax Credit is more than you owe in taxes, you can’t get a refund for the difference.
You are allowed to deduct this credit up to the amount of taxes you owe (bringing your taxes to zero) then roll over the rest of the credit amount to the next year. You can roll over your tax credit for up to 5 years or until it’s used up.
To find out the current amount of the Adoption Tax Credit call your CPA or go to Form 8839 on the IRS website
Domestic vs Foreign Adoption
You can claim expenses whether you adopt here or abroad, however, each has different time frames for deducting expenses. It’s complex and situational so you are going to want to talk to a CPA.
Special Needs Children
For the purpose of adoption, “special needs” refers to the likelihood of the child being adopted, not if they have a physical or mental disability.
No foreign child is considered “special needs”.
A domestic child with physical or mental disabilities may not be considered a “special needs” adoption, while a non-disabled child can be. The state determines if a child has “special needs” status. Adopting a special needs child may increase the amount of this credit you qualify for.
No Double Dipping
Some companies have an adoption assistance program. If your’s does, and reimburses you for specific expenses relating to your adoption, you can’t also claim those expenses on your Adoption Tax Credit.
The IRS loves you, but not that much.
Income Limits
Like most tax breaks, there are limits to the adoption credit based on your income. Once you hit the income threshold, the IRS reduces the credit available until you don’t qualify anymore. This income amount is based on your modified adjusted gross income and usually starts in the $200,000 range.
This is a very generalized overview of the Adoption Tax Credit. Since adoption is a very personal and individualized process, it’s impossible to give specific details. If you have, or plan to adopt, a child we recommend you consult an adoption lawyer and a CPA versed in adoptions.