7 Things You Need to Know about the Adoption Tax Credit
Posted on June 12, 2024
by
Joanie Stein
Growing one’s family through adoption provides prospective parents with an opportunity to experience the joys of raising children and providing them with loving and permanent homes. While the process can be costly, the federal government offers a tax credit to help families offset some of those expenses and reduce their federal tax liabilities.
Families who adopt a child in 2024 may claim a tax credit of up to $16,810 per child in qualifying adoption expenses. Therefore, the amount you can claim depends on the number of children you adopt, for which there is no limit. If you adopt two children in 2024, you may qualify for a $33,620 credit ($16,810 X 2) that can provide a dollar-for-dollar reduction in the amount of federal tax liability you owe for the year. However, like most provisions of the tax code, the federal adoption tax credit can be quite complex. Here are seven points to keep in mind.
- The adoption tax credit is subject to income limitations, which may reduce or eliminate the amount of the credit one may claim. For 2024, families with modified adjusted gross income (MAGI) of $252,150 or less can qualify for the full $16,810 tax credit for each child they adopt. The credit begins to phase out as income increases above this threshold and becomes completely unavailable when income exceeds $292,150.
- Because the credit is nonrefundable, you may receive as a tax refund no more than your federal tax liabilities for that year. Any unused adoption tax credit may be carried forward and used to offset taxable income for the next five years.
To qualify for the tax credit, an adoption must involve eligible U.S. or foreign-born children under the age of 18 or any individual who is physically or mentally unable to care for him or herself. The timing of when you may claim the credit depends on whether the adoption is conducted domestically or internationally, when you pay the expenses and when the adoption is finalized.
- Qualifying expenses are those considered reasonable, necessary and directly related to the legal adoption of an eligible child. Examples include adoption fees, court costs, legal fees and travel expenses, such as the cost of food and hotels when traveling away from home for the adoption. Specifically excluded from these covered expenses are the costs incurred to adopt the child or children of the taxpayer’s spouse.
- Families have the option to use the amount of the tax credit to either 1) offset out-of-pocket adoption expenses and reduce federal income tax liabilities, or 2) exclude from taxable income any financial assistance they received from an employer’s written adoption assistance program. However, claims for both a credit and an exclusion for the same expenses are disallowed.
For example, if a family with MAGI of less than $252,150 paid $16,000 of qualified adoption expenses in 2024 and received $4,000 in reimbursements from an employer’s adoption assistance program, only the $4,000 may be excluded from gross income in 2024, and the expenses allowable for the adoption credit would be limited to $12,000 ($16,000 of total expenses paid, less $4,000 in employer reimbursements.)
- Adoptions involving children with special needs generally are eligible for the maximum amount of credit. For tax purposes, however, the IRS considers a special needs child to be one who is a citizen or resident of the United States or its possessions when the adoption effort begins and is difficult to place, perhaps due to age, familiar circumstances, or medical needs. In other words, the child might not otherwise be adopted without a government subsidy or other form of financial assistance provided to the adoptive family.
- To claim the federal adoption tax credit, adoptive families must complete Form 8839, Qualified Adoption Expenses, and attach it to their federal tax return on Form 1040, 1040-SR (for seniors) or 1040-NR (for nonresident aliens.)
About the Author: Joanie B. Stein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she works with individuals and closely held businesses to implement sound strategies intended to preserve wealth and improve tax efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.
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