Adoption Tax Credit: Do You Qualify?

Adoption Tax Credit: Do You Qualify?

Maintaining and caring for a child involves a lot of work. Adoption, as well, is a costly process. Prepare to spend within a range of $5,000 to $40,000 if you do it privately or via an adoption agency. The federal government, in a bid to encourage adoption, came up with the adoption tax credit.

In 2018, every taxpayer enjoyed an allowable credit of up to $13,840, a slight increase from the previous year. This is part of the tax law, and the Tax Cuts and Jobs Act does not affect it. 

Who Qualifies for the Credit?

Incurring out of pocket expenses after adopting a kid under 18 makes you eligible for the adoption tax credit. It also applies to kids (U.S. Citizen, resident alien, or nonresident alien) of any age with a mental or physical disability. Adopting a U.S. kid qualifies you to claim the credit before the completion of the adoption process.

Taxpayers with higher income levels do not qualify for this credit. The adoption credit phases out gradually for taxpayers with modified adjusted gross income (MAGI) of above $207,850. Taxpayers with MAGI of over $247,580 in 2018 will not enjoy the credit. 

Role of the Credit 

Every reasonable expense relating to the adoption like the fees, attorney and cost fees, traveling expenses (accommodation while away and meals), and others apply to the credit. On the other hand, one cannot claim the credit as:

  • An expense for adopting your spouse’s kid

  • Fine for violating federal or state laws

  • Payments to surrogate parents 

  • Payments refunded by your employer

What is the Value of the Credit?

This credit is not refundable. In other words, your benefit from it is only valid when you owe federal income taxes. However, if you did not use any of the credit, it can be transferred to reduce your tax liability for five years. Also, the adoption credit is limited to the value of your out of pocket adoption expenses. This, however, does not hold if you adopt a kid with special needs.

Kids with Special Needs 

As long as you adopt a kid with special needs, you can claim the entire adoption credit amount. This applies even if your out-of-pocket expenses are not up to the tax credit value. You will still get the whole credit amount also if you didn't spend too much to adopt it.  

According to the IRS, the following defines a kid with special needs:

  • The kid is a U.S citizen or resident alien.

  • The state specifies that the kid cannot and should not live with the parents.

  • The state specifies that the kid needs special assistance to be adopted. 

Cases When the Adoption is not successful?

There are cases when you might try to adopt a U.S. kid without success. You might, however, still be able to claim the entire adoption tax credit. This applies in the year of the failed adoption attempt. 

However, in trying a foreign adoption, you only qualify for the tax credit only if the adoption succeeds. This applies to kids that are not U.S. citizens or resident when the adoption process started.

When is the Right Time to Claim Adoption Tax Credit?

You can claim the adoption tax credit a year after the adoption process if you try to adopt a kid – whether you succeeded and failed. However, you can claim the credit the same year if the adoption process was finalized the very year you started the process for a U.S. kid.

For an international kid, you might claim the credit a year after finalizing the adoption process. 

How to Claim the adoption tax Credit 

To claim the adoption tax credit, you must file and send in through IRS Form 8839 – qualified adoption expenses and include it on your tax return. It is good to keep all documents used during the adoption process like receipts and paperwork, even if the process was not successful.

Another thing you need to know is the possibility of your state offering an adoption tax credit. You can claim these credits from the state as well. The amount depends on the state. Be sure to check the tax department of your state for more information.

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