The Federal Adoption Tax Credit allows certain adoption expenses to be credited within your Federal Tax Returns. The Federal Adoption Tax Credit is a non-refundable credit, so only applies to individuals that have a Federal tax liability. The maximum Federal Adoption Tax Credit available for 2018 is $13,810. The maximum Federal Adoption Tax Credit available for 2017 is $13,570. The maximum Federal Adoption Tax Credit for the past few years may be found in the table below:
|Tax Credit Year||Maximum Federal Adoption Tax Credit|
|2018 Adoption Tax Credit||$13,810|
|2017 Adoption Tax Credit||$13,570|
|2016 Adoption Tax Credit||$13,460|
|2015 Adoption Tax Credit||$13,400|
|2014 Adoption Tax Credit||$13,190|
Each year, the maximum Federal Adoption Tax Credit available will increase in accordance with the increases in the cost of living.
If your Federal tax liability is less than the total available tax credit, the difference will carry forward so that it may be applied to the tax liability for the following year. For example, if your Federal Adoption Tax Credit is $13,810 for 2018 and your tax liability is $10,000, then only $10,000 of the Federal Adoption Tax Credit may be utilized for 2018. However, you may carry forward the unused credit of $3,810 to 2019 (for up to a total of five years).
Please note: The maximum Federal Adoption Tax Credit available is per child. So, for example, a family adopting twins in 2018 will have a maximum Federal Adoption Tax Credit of $27,620 (or 2 x $13,810).
Federal Adoption Tax Credit Limitations - For 2018, the maximum Federal Adoption Tax Credit available starts to phase out for families with a Modified Adjusted Gross Income (“MAGI”) above $207,140 and phases out completely to families with MAGI above $247,140. The Federal Adoption Tax Credit income limit is reconsidered each year based on the cost of living.
Adoption Tax Credit For Children With Special Needs - The Adoption Tax Credit for children with special needs applies to the adoption of children who are deemed by a child welfare agency to be hard to place, so is more advantageous to the Adoptive Families. In the case of children with special needs, families may claim the maximum Federal Adoption Tax Credit regardless of the adoption related expenses that actually were incurred. In order for a child to be considered to have special needs, the child must meet all three of the following characteristics:
- The child was a citizen or resident of the United States or its possessions at the time the adoption effort began,
- A state has determined that the child cannot or should not be returned to his or her parents’ home, and
- The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents.
Qualified Adoption Expenses - According to the IRS, “Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.”
Qualified adoption related expenses may include:
- Reasonable and necessary adoption fees,
- Court Costs and Attorney fees,
- Traveling expenses (including amounts spent for meals and lodging while away from home), and
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
In order for adoption expenses to qualify for the Federal Adoption Tax Credit, the expense must be accrued in a domestic, international or foster care adoption. Expenses related to surrogacy or stepparent adoptions do not qualify for the Federal Adoption Tax Credit.
For more detailed information regarding the Federal Adoption Tax Credit, Adoptive Parents may visit the IRS website at https://www.irs.gov/taxtopics/tc607. The IRS also offers “Top Ten Adoption Tax Credit Facts to Consider at https://www.irs.gov/newsroom/top-ten-adoption-tax-credit-facts-to-consider. The following links provide information on how to file for the Federal Adoption Tax Credit and for information regarding the required documentation:
Instructions to File Form 8839
When do Adoptive Parents take the Federal Adoption Tax Credit? For domestic adoptions, the timing for Adoptive Parents to claim the credit for adoption expenses is determined by either the year in which adoption expenses are paid or the year in which the adoption is finalized. In instances where the adoption is not yet finalized, the credit may be claimed for the year after the adoption expense was paid. Adoptive Parents are urged to consult with their tax professional to determine when they may take advantage of the applicable adoption tax credits.
Does the Adoption Tax Credit Apply when Adoption plan disrupts? – Prospective Adoptive Parents experiencing a disrupted adoption of a U.S. child (where an adoption plan did not come to fruition) may apply for the Federal Adoption Tax Credit. However, these Prospective Adoptive Parents must wait until the tax year following the year the expenses were paid to apply for the Federal Adoption Tax Credit. Regardless of the number of adoption disruptions Prospective Adoptive Parents have experienced, the expenses are totaled as one attempt, and the maximum allowable Federal Adoption Tax Credit is applied to that total amount spent. Prospective Adoptive Parents experiencing an adoption disruption are urged to consult with their tax professional to determine their eligibility.
Documentation Required for the Federal Adoption Tax Credit To take advantage of the Federal Adoption Tax Credit, Adoptive Parents must be prepared to establish their “adoption-related expenses” to the IRS by providing the financial documentation related to the adoption. Adoptive Parents are urged to maintain all records of adoption related expenses including credit card bills, receipts, cancelled checks, invoices and any other financial documentation related to the adoption.
Employers Offering Adoption Assistance Adoptive Parents may receive a maximum adoption expense reimbursement from their employer of $13,400 as pre-tax income. Once adoption expenses are reimbursed by the employer, depending on the total amount of adoption related expenses, the Federal Adoption Tax Credit may no longer be available. Adoptive Parents should inquire into whether their employer offers adoption benefits. In addition to excluding an employer’s adoption benefits from taxable income, Adoptive Parents may also claim the Federal Adoption Tax Credit for any additional amounts not reimbursed by the employer, up to the maximum amount allowed for that tax year. However, Adoptive Parents may not claim the Federal Adoption Tax Credit and the employer’s adoption benefit exclusion for the same expenses. Adoptive Parents are urged to consult with their tax professional.
Adoptive Parent’s Dependency Tax Credits – Although the Personal Exemption was eliminated beginning with tax year 2018, Adoptive Parents may claim a child placed with them for adoption as a dependent for the purpose of applying for the Child Tax Credit, Child and Dependent Care Tax Credit and the Earned Income Tax Credit. These are the same tax credits available for biological children and may reduce taxable income. Adoptive Parents are urged to consult with their tax professional regarding these tax credits.
Temporary Tax ID for Pending Adoptions – Once a baby is placed for adoption, the Adoptive Parents may apply for a temporary Adoption Tax Identification Number (“ATIN”) for the child. Adoptive Parents may utilize this ATIN on their tax returns. The IRS Form W-7A “Application for Taxpayer Identification Number for Pending U.S. Adoptions may be found at https://www.irs.gov/pub/irs-pdf/fw7a.pdf
Obtaining a Social Security Number for an adopted child – Adoptive Parents are authorized to apply for their child’s Social Security number after the adoption is finalized through court action. So that the information used to create the record is that of the post-adoption circumstances, Adoptive Parent are encouraged to wait until receipt of the post-adoption birth certificate, which shows them as the baby’s parents, and bears the name that they’ve chosen for their child.
State Adoption Tax Credits There are several states that offer an additional state adoption tax credit to their residents (up to an additional $10,000). States offering Adoption Tax Credits on the state level include: Alabama, Arkansas, California, Georgia, Indiana, Iowa, Kansas, Michigan, Mississippi, Missouri, Montana, Ohio, Oklahoma, South Carolina, Utah, West Virginia and Wisconsin. Adoptive parents are urged to consult with their tax professional to determine if the state tax credits are applicable.
For more information about the Federal Adoption Tax Credit and adoption services available, please contact an Adoption Consultant at 1 (800) 367-2367.
*DISCLAIMER: Adoption Network Law Center (ANLC) specializes in domestic newborn adoptions. ANLC does not offer tax advice and urges adoptive parents to talk to their tax professional as to how they may benefit from the Federal Adoption Tax Credit.