How does adoption tax credit work?

Before one jumps to find the answer of this question, one should know ” What is adoption tax credit ?”. So let me begin with that. As per the Internal Revenue Code, anyone adopting a child whether via public foster care, domestic private adoption, or international adoption, shall get a tax credit for qualified adoption expenses on such adoption. This is known as the Adoption Tax Credit. For the tax year 2020, the maximum amount of tax credit per child is $14,300.

Who qualifies for adoption tax credit ?

Most parents who desire to adopt will qualify for this tax credit except in the following two situations

  1. If, the modified adjusted income of the adoptive parent is $ 254520 in 2020. The tax credit begins to phase out at $214,520 of MAGI and phases out entirely at an income of $254,520.
  2. The adoption tax credit is also not available for adoptions of stepchildren.

What about adoption of “special needs” child?

When state’s welfare agency determines that the child cannot be returned to his or her parents’ home and that the child probably will not be adoptable without assistance provided to the adoptive family, such a child is considered “special needs ” child.The child must meet all three of the following characteristics:

  1. “The child was a citizen or resident of the United States or its possessions at the time the adoption effort began (US child).
  2. A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home.
  3. The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:
    • The child’s ethnic background and age,
    • Whether the child is a member of a minority or sibling group, and
    • Whether the child has a medical condition or a physical, mental, or emotional handicap.”

Therefore, law provides that a person adopting such a child will be eligible to claim maximum tax credit without actual out-of-pocket expenses.

Is child adoption expense allowed deduction ?

Yes , apart from the credit, the IRC provides that adopting person can deduct the adoption expense from his income. Types of expenses that can be Qualified adoption expenses include:

  1. Adoption agency fees for facilitating the child adoption process
  2. Attorney fees
  3. All court costs you incur
  4. Any re-adoption expenses that relate to the adoption of a foreign child.
  5. The travel expenses you incur in relation to the adoption of the child, including the cost of food and hotels when traveling away from home.

However certain expense may not be allowed like

  1. Any amount that employer reimburses on tour,
  2. Fees you pay to a surrogate mother, or
  3. Any expenses that relate to the adoption of your spouse’s child.

What if my employer reimburses adoption expense?

Even in that case , you will be able to deduct the qualified adoption expenses paid or reimbursed by an employer, up to the same limit as the tax credit from your income .

However, one should note that you can not claim both the exclusion as well as credit for the same expenses for both.

Will the adoption tax credit ever be refundable again?

The answer is NO. Basically, the adoption tax credit which remains after setting off with your tax liability is non-refundable. However, the balance of the tax credit can be carried forward for up to five years.

How to claim adoption tax credit ?

The taxpayer must fill the IRS Form 8839 and submit it with their Form 1040 when they file their 2020 taxes.

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