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Adoption & Your Taxes

Adoption & Your Taxes

The adoption process also has its tax implications, including a tax credit for qualified adoption expenditures paid to adopt an eligible child. It also entails the exclusion from employer-provided income for adoption support.

This tax credit is nonrefundable, meaning that it is limited to your tax liability for that year. But any other credit in excess within your tax liability will be brought forward (this will be for up to five years). The highest amount of adoption taxes (this is the dollar limit) is $14,300 per child. 

Qualified adoption expenditures

For qualified adoption, expenditure tax credit and all exclusions are stated in section 23(d) (1) of the tax code. The specific ideas include:

  • Traveling expenses which comprise money spent on food and lodging when away from home. 

  • Court expenses and attorney fees 

  • All necessary adoption fees 

  • Additional expenses are related to the purpose of legal adoption of an eligible child. 

All expenses could be considered “Qualified adoption” even if you made payment before an eligible child was identified. For instance, potential adoptive parents who pay for the child’s home study from the start of the adoption procedure can treat the fee as qualified adoption expenses. So who is an eligible child? 

An eligible child is a person under 18 who cannot mentally and physically take care of himself. The qualified adoption expenditures do not include expenses the taxpayer offers to adopt the child of a taxpayer’s spouse. 

The qualified adoption expenditures include all fees paid by the registered domestic partner living in the state, which permits same-sex second parents or co-parents to adopt their partner’s child. 

Adopting a child with special needs 

If you adopt a child exhibiting special needs, you will be eligible for a maximum amount of credit in the final year. When the child’s adoption is final (for example, in 2020), the highest permissive credit will be $14,300. 

Once the state determines that the child has special needs, your employer must write a qualified adoption assistance program. If your employer writes it successfully, you may then be eligible for an exclusion. Of course, this will happen even if your employer did not pay the qualified adoption expenses. 

A child will be termed as having ‘Special needs” for adoptive expenses if he fulfills the following: 

  1. They are a resident or citizen of America when the adoption process begins. 

  2. If a state ascertains that the child cannot be returned to their previous home. 

  3. If the state determines that the child will not be adoptable without assistance offered by the adoptive parents. 

You can ascertain your filing status by reading the IRS Publication 501. However, if you file your returns with the “Married filing” separate from your filing status in a year, the qualified adoption expenditure will be allowable. This then means you can claim the credit or exclusion for those expenses. 

Potential adoptive parents can also file amended returns to change to a qualifying filing status within the limited period. There are exceptions for taxpayers who do not live together with their spouses and meet other requirements. 

For instance, a husband and wife may have paid qualified adoption expenses at $3,000 (let’s say in 2018); they will pay $4,000 in 2019 and $5,000 in 2020. By the year 2020, the adoption process at the domestic level will become final. They have also filed marriage separately for all their previous tax years. 

So at the 2020 tax return, they will file married taxes jointly but only $9,000 (the couple’s $4,000 paid in 2019 and the $5,000 paid in 2020) of all the expenses that qualify for 2020. Since the couple has filed married taxes separately in 2019 and paid $3,000 in 2018, which is permitted for 2019, they cannot claim an adoption credit for the expenses if they change the filing to a “Joint” status for 2019.



Dennis Jao
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