Adoption Tax Credit

American families have been helped by  the adoption tax credit since 1997.  In 2013, the tax credit was made permanent as part of the American Taxpayer Relief Act of 2012.  This credit applies to all types of adoption except stepparent adoption, including international, domestic, private and public foster care.  The credit makes adoption more viable for parents who otherwise might not have been able to afford it. 

Unfortunately, the adoption tax credit is not refundable, which means lower and moderate income families do not benefit as much as higher income families.  Without refundability, the majority of the benefit goes to families making over $100,000 per year.  (This is a change from the 2010 and 2011 tax years when the credit was refundable). 

What does a non-refundable tax credit mean?

A non-refundable credit is one that allows taxpayers to receive a refund of federal income taxes, but only up to the amount of taxes they had due.  In one year, taxpayers can use as much of the adoption credit as the full amount of their tax liability (line 46 on Form 1040) less other credits due, such as the child tax credit.  Families with a low to moderate income typically have no tax liability and will not benefit from a non-refundable credit.  Even if a family doesn’t have a tax liability to file for the credit (Form 8839) you should still file for it in case your tax liability changes in future years.  Taxpayers have a total of six years to use the credit- the first year eligible and the next 5 subsequent years. 

What is the maximum amount of credit for 2013?

For 2013, the maximum adoption credit is $12,970 per child.  The maximum multiplies in relation to the number of children adopted.  There is no limit to the number of children adopted. 

What qualified adoption expenses are included in the tax credit?

  • Adoption fees
  • Attorney fees
  • Court costs
  • Travel expenses
  • Meals and lodging away from home
  • Re-adoption expenses related to foreign adoption

Expenses with do NOT qualify:

  • Services for which you received funds under any state, local or federal program
  • Those that violate state or federal law
  • Surrogate parenting arrangement
  • Step-parent adoption
  • Any expense which is paid or reimbursed by your employer or any other person or organization
  • Expenses which are allowed as a credit under any other provision of the federal income tax

What is a special needs adoption?

A special needs adoption is one that the state or county child welfare agency has determined it is unlikely for the child to be adopted unless the government provides assistance to the adoptive family.  Generally, this pertains to foster children, older children, sibling groups or physical, emotional or mental disabilities that are United States citizens when the adoption effort began.  If a child is adopted out of foster care with an adoption assistance agreement they are considered special needs.  Those who do not have an agreement are not.  Many United States children with disabilities are not considered special needs for the purposes of the tax credit.   Internationally adopted children are not considered special needs for the adoption tax credit. 

For special needs or international adoptions, you cannot claim the adoption credit until taxes are filed for the year the adoption was finalized.  If a child is placed in one year (ex. 2012), but the adoption isn’t finalized until the next year (ex. 2013) you can’t claim the credit until you file your taxes the following year (2013 taxes are filed in 2014). 

If you never filed for the credit, but adopted in 2005 or later, you may still be able to claim the credit. 

Can I claim for failed adoptions?

Yes, you may claim expenses for failed domestic adoptions if you had qualified adoption expenses.  It is treated as a non-finalized adoption.  You must wait a year after you incur the expenses.  If you had expenses for a failed adoption in 2011, you must claim them with your 2012 taxes which are filed in 2014.  There is no credit for failed international adoptions. 

Would you like more information directly from the IRS?  Click here for the link to the Adoption Credit and Adoption Assistance Program.