So what is the adoption tax credit? It is an important federal tax benefit and can have significant financial impact for many adoptive parents. To take advantage of this benefit, you must understand what it is, which expenses are eligible, and what you need to do to receive the refund.
This is great news for prospective adoptive parents. This is NOT a deduction, but it is a tax refund based on your income and your adoption expenses. You can request 100% or a dollar for dollar tax credit of the amount of qualified adoption expenses you incur during a domestic or international adoption.
The credit was taken away in 2012, but reinstated and made a permanent statute in tax law in 2013. The credit has made adoption more affordable for many adopting parents who may not have otherwise been able to adopt. This has allowed more children to find safe, loving families and homes.
For 2017, the federal adoption tax credit is $13,570.
Expenses allowed under the law are very specific and have to be directly related to the adoption process. It can only be used to reimburse an adoptive parent for reasonable necessary adoption fees. Fortunately, most expenses qualify, including: court costs, attorney fees, agency fees, traveling expenses (meals and away lodging), and any fees whose principle purpose is for the legal adoption of an eligible child.
Birth mother expenses are allowed if directly related to the adoption. Please keep a very detailed document and receipts. The IRS may/will question these expenses.
Unallowable expenses are daycare, formula, baby items (such as stroller or diapers etc).
To claim the adoption tax credit in domestic adoption, it should be done the year after payment is made. Unless the adoption is finalized, then it is taken the same year.
In my family’s case, our son was born in March 2013, and his adoption was finalized in December 2013. In April 2014, we filed our taxes, and in our return that year, we received all that we had claimed of our adoption expenses, no more than the $13,570 that the law allows.
The tax credit rules are different for international adoptions. Expenses are only claimed in the year the adoption becomes final.
Failed domestic adoptions can also qualify for the tax credit. If the adoption is unsuccessful, one of the amazing things about the adoption tax credit is that eligibility does not change or stop if the adoption is not finalized. Expenses with any adoption attempt, of a specific child, may be reimbursed through the credit. However, a failed international adoption does not qualify. You can only claim the ATC for finalized international adoptions.
In order to take the adoption tax credit, you must be prepared to provide documentation to the IRS showing expenses were a “Qualified Adoption Expense.” So please keep all receipts, invoices, and finalization documents so you can submit them.
To claim the tax credit, you must fill form 8839 “Qualified Adoption Expenses” and attach to form 1040 or 1040A.
The adoption tax credit is complex, and the IRS reviews a lot of claims every year. You must document it carefully or ask for help from a tax professional.
The tax benefits of adoption can be financially rewarding when properly claimed. An important part of any adoption plan is consideration of costs and financial resources out there that are available for you. This program and other subsidies are yet another wonderful reason to consider adoption to build your family and help you to see/realize it doesn’t have to be too far out of your reach!