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Adoption Tax Credit Updates for 2023

Adoption Tax Credit Updates for 2023

Every year, thousands of families in the United States are happy to adopt a child and welcome them into their homes. And as with any growing family, there are expenses associated with it. To avoid some of the costs that can prevent a family from affording an adoption, the federal government has introduced the Adoption Tax Credit (ATC).

This article will focus on the Adoption Tax Credit benefits, eligibility requirements, and the latest updates for the coming year. Please contact a financial advisor if you need assistance with this tax credit or any other tax credit for which you may be eligible.

What is the Adoption Tax Credit?

The adoption tax credit is a federal credit for eligible taxpayers participating in international, domestic, private, or public adoptions. Credit can be issued in two ways;

Claiming eligible expenses: The first way is to claim credit through qualifying adoption expenses. Eligible expenses are all adoption-related expenses, such as:

  • Adoption agency fees

  • Adoption attorney fees paid to an attorney

  • Court costs

  • Travel reimbursement, including meals and accommodation

To claim these taxes against your credit, you must file Form 8839 with your tax return. The IRS will only give credit up to your expenses, not to exceed the maximum credit. This applies to all types of adoption; international, national, private, or public.

Example: The 2022 ATC maximum was $14,890. Family A had $35,000 in qualified adoption expenses from international adoption travel and attorney fees. It could only get $14,890 in credit because that was the maximum per child. Family B has had $10,000 in eligible adoption expenses since the adoption. They only got $10,000 in credit because they only spent $10,000.

Adopt a child with special needs: If the child you adopt qualifies for a special needs adoption, you will receive the full tax credit, regardless of the expenses incurred.

Example: A couple adopted a child from out of state who was believed to have special needs. The couple paid no adoption fees, but since the adoption is considered special needs, they will receive the full $14,890 credit.

How does the adoption tax credit work?

Like all tax credits, the adoption tax credit is deducted directly from the taxes you owe. This generally favors a tax deduction that only reduces taxable income. More taxpayers see a better return this way because once they meet their tax obligations (regardless of their tax), any remaining credit is refunded.

Example: A family initially owes $1,000 in taxes in 2022. Since the family finalized an adoption in 2022, they now receive an adoption tax credit (say they received the full credit of $14890) and a child tax credit (i.e., $2,000).


Adoption tax credit updates for 2023

Recent economic changes have pushed inflation up. In response, the federal government adjusted various tax codes to account for the rising cost of living. The adoption tax credit was one of the tax codes positively affected by the reorganization. We'll discuss the change below, along with more general ATC information.

How much is the tax credit for adoption?

The adoption tax credit for the 2023 tax year (which would be filed in 2024) is $15,950, an increase of $1,060 from 2022. Such a large increase is rare, especially in recent years. For example, over the past six years, the average increase was $238, and the highest increase was from 2021 to 2022, when taxpayers saw an increase of $450.

Who can benefit from the tax credit for adoption?

The parties eligible for the adoption tax credit for the fiscal year 2023 are:

  • Taxpayers who adopt children under the age of 18. If the child is over 17, the child must be physically unable to care for his/herself for the adoptee to be eligible for ATC.

  • Taxpayers participating in international, national, public, or private adoptions.

  • Taxpayers with income below $239,230 can claim up to the full credit.

  • Taxpayers with income between $239,230 and $279,230 can claim a partial credit.

Parties not eligible for the adoption tax credit include:

  • Taxpayers who have adopted their spouse's child.

  • Taxpayers whose income exceeds $279,230.

When can I claim the adoption tax credit?

Depending on the type of adoption, the credit can be used if you completed or started the adoption process within the previous year.

  • For foster or cross-country adoptions, claiming credit is impossible until the adoption is complete.

  • For home adoptions, you can choose to wait for the adoption to be completed or for a fee to be charged. The total credit cannot be exceeded, but you can spread the credit over five years if your expenses cover that period.

Please note that all expenses incurred must be reported for this tax year.

Example 1: Family A initiated and finalized an adoption in 2022. For taxes, the family can claim total eligible expenses up to a maximum of 2022 ATC.

Example 2: Family B started a stay-at-home adoption in 2020 and completed it in 2022. They claimed $4,000 of allowable expenses in 2021. They can now claim the remaining credit allowed on their 2022 returns for any additional expenses eligible in 2022.

What do I need to claim the tax credit?

All adoptions require a document known as a final judgment on adoption, and additional documents depend on the type of adoption. Foster adoption requires a grant agreement as an additional document. Domestic and international adoptions require a home study as additional documentation and a receipt for all eligible expenses.



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