IRS – Adoption Tax Credit and the Benefits of Qualified Adoption ExpensesPublished:
Overview of Adoption Tax Benefits
This credit seems pretty direct, but a lot of paperwork. Then again, if you’re adopting a kid, the paperwork’s not quite what’s top of your mind, is it?
Adoption can be a costly and time-consuming process, but the good news is that there are several federal and state tax benefits available to adoptive parents. These tax benefits aim to ease the financial burden that comes with the adoption process and ultimately encourage more families to adopt eligible children.
The history of the adoption tax incentives dates back to 1997 when a federal tax credit for qualified adoption expenses was introduced. Since then, there have been several changes to adoption tax incentives, including the maximum credit amount and the types of expenses that can qualify for the credit. To qualify for this tax credit, the child must be under 18 years old or have special needs, and the adoptive parents’ taxable income must fall below a certain threshold.
When it comes to claiming the Adoption Tax Credit, it’s important to understand the requirements surrounding eligible children. The IRS states that any child who is under the age of 18 or who is physically or mentally incapable of self-care is considered eligible for the credit.
In addition to these basic requirements, there are also certain criteria that must be met for a child to be considered “special needs.” This designation is given to children who have a documented medical condition, physical or mental disability, or emotional or behavioral issue that makes them harder to place for adoption. Children who meet these criteria may be eligible for additional benefits, including an increased tax credit amount and the ability to claim expenses incurred before the adoption was finalized.
It’s worth noting that there are also age and residency requirements for eligible children, and there is a maximum adoption credit. In general, a child must be under the age of 18 at the time of the adoption to qualify for the credit. However, there are some exceptions to this rule for special needs children. Additionally, the child must either be a U.S. citizen, a resident alien, or physically present in the U.S. for at least 183 days during the year.
Legal Requirements for Adoptions
Adoption is a legal process that creates a permanent, legal relationship between a child and their adoptive parents. However, before proceeding with adoption, it’s essential to understand the legal requirements for adoptions and comply with them.
Legal requirements for adoption may vary between states, and it’s crucial for adoptive parents to be aware of these requirements. These requirements may include age requirements for the adoptive parents, criminal background checks, home studies, and other factors that ensure the safety and well-being of the child.
Adoptive parents must also comply with any specific laws that may apply to the type of adoption they are pursuing. For example, international adoptions may involve compliance with laws of the child’s country of origin, while domestic adoptions may require compliance with state laws.
Domestic vs. International Adoptions
When considering adoption, one of the first decisions families have to make is whether to pursue a domestic or international adoption. While both options provide loving homes for children, there are some important differences to consider – including the impact on qualifying for the Adoption Tax Credit.
Domestic adoptions involve the adoption of a child who is a U.S. citizen or resident. These types of adoptions typically involve going through a state or private agency, with the adoptive parents working closely with the birth mother and the agency to complete the adoption process.
International adoptions, on the other hand, involve adopting a child who is a foreign citizen. These adoptions involve navigating the laws of the child’s birth country, as well as the U.S. legal system. This can make the process more complex and time-consuming, but international adoptions can also provide families with the opportunity to offer a home to a child in need from another country.
When it comes to qualifying for the Adoption Tax Credit, both domestic and international adoptions are eligible for the credit. However, the specific expenses eligible for the credit differ between the two types of adoptions.
Here are a few qualified adoption expenses for domestic adoptions:
- adoption fees
- court costs
- attorney fees
- travel expenses
These expenses must be incurred prior to the adoption being finalized.
For international adoptions, qualified expenses may also include translation fees, foreign legal fees and the costs associated with adopting the child in their foreign country. These expenses can add up quickly, making international adoptions more expensive than domestic adoptions.
Stepparent adoptions are a common type of adoption that occur when a spouse adopts the biological child of their partner. This type of adoption allows the stepparent to become the legal parent of the child, providing them with all of the same rights and responsibilities as a biological parent.
The process for stepparent adoptions typically involves filing a petition with the court to initiate the adoption process. As part of this process, the stepparent will need to obtain consent from the biological parent or terminate their parental rights.
Once consent has been obtained or rights have been terminated, the stepparent will then need to complete a home study and meet other legal requirements for adoption. This will typically involve undergoing a background check, completing parenting classes, and meeting with a social worker.
Employer-Provided Adoption Assistance
Adoptive parents may face significant expenses during the adoption process, including agency fees, legal fees, and other qualified adoption expenses. Fortunately, some employers offer adoption assistance as part of their benefits package to help offset these costs along with the adoption credit.
What are employer-provided adoption benefits? Essentially, they are financial assistance provided by an employer to employees who are adopting a child. This benefit may include reimbursement for qualified adoption expenses, such as adoption fees, court costs, and travel expenses.
Under IRS guidelines, adoptive parents who receive employer-provided adoption benefits may be eligible to exclude up to a certain amount of these benefits from their taxable income. For 2021, the maximum amount that can be excluded was $14,440. This means that adoptive parents who receive benefits from their employer up to this amount will not have to pay income tax on that portion of the benefits.
To be eligible for the exclusion, adoptive parents must meet certain criteria. First, the adoption must be a legal adoption of an eligible child under the age of 18, or a child with special needs. Second, the adoptive parents must be employed by a company that offers adoption benefits. Finally, the amount of adoption benefits received cannot exceed the qualified adoption expenses incurred by the adoptive parents.
It’s essential to note that adoptive parents cannot claim the same expenses for the exclusion that they are claiming for the adoption tax credit. For example, if an employer reimburses an adoptive parent for a qualified adoption expense, the parent cannot also include that expense when claiming the adoption tax credit. This helps to prevent double-dipping and ensures that the benefits and credits are only being claimed for eligible expenses.
Families who spent less than the maximum amount of employer-provided adoption assistance may also need to complete additional steps when reporting their applicable expenses for exclusion. For example, if a family received $10,000 in employer-provided adoption benefits but only had $8,000 in qualified adoption expenses, they would need to report their expenses differently than a family who had $14,440 in qualified expenses.
Typical Expenses in the Adoption Process
Adopting a child can be an expensive, yet rewarding process. It is important for prospective adoptive parents to be prepared for the financial costs associated with adoption. The typical expenses that an adoptive family can expect to incur throughout the adoption process can vary depending on the type of adoption, but commonly include adoption fees, court costs, attorney fees, travel expenses, and home studies.
Domestic adoption fees can range anywhere from $10,000 to $50,000 or more, depending on the adoption agency, type of adoption, and location of the adoption. Adoption fees can cover costs such as social work assessments, birth mother expenses, and the adoption ceremony. Court costs can range from state to state and usually involve the finalization of the adoption and any legal documents that may need to be filed.
Attorney fees will also vary depending on the complexity of the adoption process and may increase with any legal issues that arise. In some cases, an attorney may be necessary to complete certain steps in the adoption process, such as the termination of parental rights.
Travel expenses can be a significant cost for international adoptions, particularly if the adoptive family needs to make multiple trips to the child’s home country. These expenses can include airfare, hotel accommodations, meals, and transportation.
Home studies are required for all adoptions and involve a process that assesses the prospective adoptive parents’ readiness to provide a safe and loving home for the child. Fees for home studies can vary by state and can range from $1,000 to $3,500 or more.
It’s important to note that not all expenses related to the adoption process are eligible for the adoption tax credit. The credit is only available for “reasonable and necessary” adoption expenses, and expenses that are deemed excessive or unrelated to the adoption process may not qualify. It’s important to consult with a tax professional regarding eligibility for the adoption tax credit.
Maximum Amount of Credit Allowed per Child
For tax year 2022, adoptive parents can claim a maximum adoption tax credit of $14,890 per child. However, this adoption credit can only be claimed for qualified adoption expenses up to the maximum amount. The credit is also available for parents who adopt a child with special needs, even if they have no qualified adoption expenses. This means that adoptive parents can still claim the maximum credit amount if they adopt a child with special needs.
It’s important to note that the maximum credit allowed per child is subject to an income limit. The credit begins to phase out for adoptive parents with modified adjusted gross incomes (MAGI) above $267,140 and is completely phased out for MAGIs above $307,140. Any unused portion of the credit in a given year can be carried forward for up to five years.
It’s worth mentioning that the maximum credit amounts for tax years 2020 and 2021 differ from that of 2022. For tax year 2021, the maximum credit allowed per child is $14,440, and for tax year 2020, it is $14,300. The income phaseout range for tax year 2021 is MAGIs between $264,850 and $304,850, and for tax year 2020, it is MAGIs between $214,520 and $254,520.
Non-Qualified Expenses Not Eligible for Tax Credit
When it comes to claiming the adoption tax credit, it’s important to be aware of the types of expenses that are considered non-qualified and, as a result, not eligible for the tax credit. Such expenses cannot be claimed as a tax benefit and it’s essential to keep them separate from the qualified expenses that are eligible for the credit.
One type of expense that does not qualify for the adoption tax credit are any expenses that were reimbursed by an employer. This includes any employer-provided adoption benefits that may have been received by the adoptive parents. These expenses are considered non-qualified because the adoptive parents have already received reimbursement for them, and therefore, cannot claim them as a tax credit.
Another type of non-qualified expenses are those that were already allowed as a credit or deduction under any other provision of federal income tax law. For instance, if an adoptive parent has already claimed a deduction for a particular adoption-related expense, they cannot avail of an additional tax credit for that same expense.
Expenses incurred in violation of state or federal law are also not considered qualified expenses. Any expense that is illegal, such as a bribe or a payment that contravenes state or federal law, cannot be claimed as a tax credit.
Expenses related to carrying out a surrogate parenting arrangement are also non-qualified and are not eligible for the adoption tax credit. This means that expenses related to the adoption of a child through a surrogate, such as fees associated with surrogacy arrangements, do not qualify for the tax credit.
Finally, any expenses related to the adoption of the spouse’s child are considered non-qualified and not eligible for the adoption tax credit. These expenses are essentially seen as part of regular family expenses and do not fall under the specific category of adoption-related expenses that are qualified for the tax credit.
How to Calculate Adoption Tax Credit and Benefit Amounts
If you’re an adoptive family, you may be eligible for the adoption tax credit, which is designed to help offset costs associated with the adoption process. However, it’s important to know how to calculate the credit and benefit amounts because not all expenses are eligible, and there are certain income limitations for eligibility.
To determine the adoption tax credit, first, you need to calculate your qualified adoption expenses. These expenses include adoption fees, court costs, attorney fees, and other reasonable expenses directly related to the adoption process. It’s important to note that any expenses that have been reimbursed by an employer or have already been allowed as a credit or deduction under any other provision of federal income tax law are not considered qualified expenses.
The adoption tax credit has a maximum per child. However, the credit begins to phase out for taxpayers with modified adjusted gross incomes (MAGI). In 2021, it phased out for taxpayers with MAGI beyond $216,660 and completely phases out for taxpayers with MAGI over $256,660. This means that if your MAGI is over $256,660, you won’t be eligible for the adoption tax credit.
If you adopted both domestically and internationally, you may be eligible for the adoption tax credit for both adoptions. However, the credit amount may differ depending on the adoption-related expenses incurred. To calculate the credit for both adoptions, you need to complete Form 8839, which is the Qualified Adoption Expenses form. This form allows you to provide information on your adoption-related expenses, which are used to calculate your credit.
Apply for the Adoption Tax Credit: The Basics of Form 8839
Applying for the Adoption Tax Credit can be a daunting task, but with proper guidance and preparation, it can help offset the cost of qualified adoption expenses. To ensure that you are taking full advantage of the tax credit, reference the following steps for experienced-based insight on applying for the Adoption Tax Credit.
Filing an Income Tax Return with Form 8839
Filing an Income Tax Return with Form 8839: A Comprehensive Guide to Claiming the Adoption Tax Credit
For adoptive families, the adoption tax credit is an important financial benefit that can help offset the costs associated with the adoption process. Here’s how to do it:
Step 1: Determine If You’re Eligible to Claim the Adoption Tax Credit
Before you start the process of claiming the adoption tax credit, you need to determine whether you’re eligible. The adoption tax credit is available to adoptive parents who have adopted an eligible child and paid qualified adoption expenses. The credit is also available for adoption attempts, but it can only be claimed in full when the adoption is finalized.
Step 2: Understand the Timing Rules
Different adoptions affect the timing for qualified expenses. For domestic adoptions, you can claim the credit in the year the adoption becomes final. For international adoptions, you can claim the credit in the year the adoption becomes final or in the year the expenses were paid, whichever is later. For special needs adoptions, you can claim the maximum credit in the year the adoption becomes final, regardless of the amount of qualified adoption expenses paid.
Step 3: Complete Form 8839
This form will ask you to provide basic information about your adoption, as well as the amount of qualified adoption expenses you paid. The form also includes a worksheet to help you calculate the credit amount.
Step 4: Keep All Adoption Documentation
It’s critical to keep all adoption documentation for your records. Incomplete or inaccurate adoption documentation can result in the denial of your adoption tax credit. Therefore, it’s important to keep documents such as adoption decrees, adoption disruption agreements, adoption paperwork, and receipts for qualified adoption expenses.