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Adoption Credit For Eligible Adoption Expenses

Adoption Credit For Eligible Adoption Expenses

To help taxpayers adopt children, U.S. tax laws provide an adoption credit, up to an inflation-adjusted maximum, for adopting a child under 18 or a person of any age with a physical or mental disability. The credit is claimed on Form 8839, which must be submitted by the end of the tax year.

The SECURE Act allows up to $ 5,000 in distributions without penalty for retirement plans after 2019 when used to pay for a qualified birth or adoption, which means a child under the age of 18 (but not a spouse's child) or a child who is physically or mentally unable to support his/her self. The distribution must take place within one year of the child's birth or after the end of the adoption.

Couples must file a joint return to claim this credit, unless a divorce decree or alimony decision legally separates the couple or if the spouses have lived separately during the last six months of the fiscal year and that the adoptive spouse provided the adopted accommodation for more than half of the fiscal year and paid more than half of the cost of support. However, please note that the adoption credit cannot be used to offset the costs of adopting a spouse's child.

The 2010 HealthCare Reform Act made the adoption credit repayable, meaning the credit will also offset the tax debt. If the credit surpasses the taxpayer's total tax debt, the difference will be reimbursed. However, from 2012, this credit will no longer be repayable, but any unused credit can be transferred.

The adoption credit is adjusted annually for inflation. The maximum credit limit refers to each child, not each taxpayer, so a taxpayer who adopts two children can claim up to twice the maximum. The taxpayer can claim the maximum credit on a child with special needs when the adoption is complete, even if the credit exceeds the costs of an eligible adoption.


Eligible adoption expenses include:

  • Court costs,

  • Legal fees,

  • Reasonable and necessary adoption rates,

  • Social services review cost,

  • Transport costs,

  • Travel expenses outside the home 

  • Other related expenses for the legal adoption of the child.

However, adoption expenses that an employer or other organization has reimbursed are deducted from eligible expenses.

An employer can also provide deductible assistance for adoption costs, subject to the same MAGI limits and restrictions as adoption credit. The adoption credit and employer assistance can be used to offset adoption costs, but the two cannot be used for the same expenses. 

No credit can be claimed for the child's adoption or the cost of an adoption contract. For expenses paid in previous years before final adoption, credit can be claimed the following year. For a child who was a citizen or resident of the United States, a credit may be required for expenses incurred after the adoption ends in the year in which the payment was made.

Any unused adoption fee credit can be accumulated for up to 5 years on a "first come, first served" basis.

For instance: You pay $5,000 for adoption expenses in 2016, but the adoption was not completed until 2017. You can claim a credit for expenses incurred in 2016 and expenses incurred in 2017 on your 2017 tax return.

However, the credit begins to be eliminated when the modified adjusted gross income (MAGI) exceeds the elimination limit and is eliminated at the elimination limit.

Magi restrictions on the adoption credit by year

Year

Phaseout
Threshold

Phaseout
Limit

Maximum
Credit

2017

$203,540

$243,540

$13,570

2018

$207,580

$247,580

$13,840

2019

$211,160

$251,160

$14,080

2020

$214,520

$254,520

$14,300

2021

$216,660

$256,660

$14,440

 

Any assistance provided by the employer for adoption costs must be included in the MAGI calculation. The adoption credit is not repayable after 2011.

 

The adoption credit requires the child's social security number. If the child doesn't have an SSN or there is not enough time to obtain one, the adoptive parent can apply for an adoption tax identification number (ATIN) on the IRS Form W-7A. If your child is not entitled to a Social Security number, they must obtain an Individual Identification Number (ITIN) by submitting Form W-7.


Adopting a child with special needs who is a U.S. citizen

If an American child has special needs, the taxpayer who adopts the child can claim the full adoption credit, regardless of the actual expenses. If the child has special needs, this must be determined by the state or other relevant government authority and must be proven by some form of certification, such as a certification from a national health agency or municipality that the child has special needs or has been approved for adoption assistance.

The credit for full adoption can only be claimed when the adoption is final. When the taxpayer applies for the loan, he/she must also present the following documents:

  • Decree or final adoption order

  • The determination by the state in which the child has special needs

  • Any adoption, decision, order, or final decree of the state court that lists the parents and the adopted child's names and is signed with the seal of a representative of the state court.


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Dennis Jao
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