The process and the related costs of adoption prove to be a major hurdle for many families. Between legal, medical, and court costs – not to mention airfare, food, and accommodations while traveling to adoption-related appointments— it’s no surprise that adoptions in America can easily climb to $30,000 – and sometimes more. Fortunately, there are tax breaks and, in some cases, employer benefits to help offset your expenses as an adoptive parent.
The adoption tax credit
The adoption tax credit is a tax benefit worth up to $13,840 per child for qualified adoption expenses. These include court costs and attorney fees, travel costs (food and lodging), and other expenses directly related to the adoption of a qualifying child. The adoption credit is non-refundable, but if your tax liability is $0, any remaining credit can be carried forward for up to five years.
Can I claim the adoption tax credit?
First of all, to be eligible for the credit the child you are adopting must either be under 18 years old or physically or mentally incapable of caring for themselves.
The amount you can claim depends on the actual cost of the adoption and your modified adjusted gross income. If your adoption costs are greater than or equal to $13,840, you can claim the full credit amount. The credit begins to phase out for taxpayers with a modified adjusted gross income of $207,580 and goes to $0 if your MAGI is $247,580.
If you are reimbursed by your employer for any of your adoption costs, you can only claim the credit for non-reimbursed expenses (see below for more on employer reimbursements).
When should I claim the adoption tax credit?
The tax year you’ll claim the credit depends on when you paid your expenses, the year your adoption was finalized (if it was finalized), and whether the adoption was domestic or foreign.
If you adopt a child who is already a U.S. citizen, the IRS allows you to claim credit the tax year immediately following the payment of qualified expenses, even if the adoption was not finalized at the time (and even if it never is finalized).
If you adopt a child from a foreign country, your expenses are allowable as a credit for the year the adoption is finalized.
My adoption is in progress. Can I get credit for my expenses this year?
If your adoption has not been finalized or it was unsuccessful by the time you file your taxes, you can still get the tax credit for the costs you paid during the taxable year. In subsequent years, the amount of the adoption credit you claim will need to be reduced by the amount you already claimed. For example, if you claim a credit for $3,000 this year for adoption efforts, you can claim the remaining $10,840 next tax year when your adoption is finalized.
What if my child has special needs?
If your employer has a written qualified adoption assistance program and you adopt a child that is considered “difficult to place” by the state’s child welfare agency, you might be eligible for the tax credit, even if you didn’t pay qualified adoption expenses.
The employer reimbursement exemption
If your employer pays some of your qualified adoption expenses – either directly to you or to a third party – you can exclude the reimbursed amount from your taxable income, up to $13,840.
Say the final cost of your adoption efforts is $20,000 and your employer reimburses $5,000 of it. You can exclude $5,000 from your income and you can take the full $13,840 for the tax credit. The combined exclusion and credit total $18,840. That leaves you with $1,160 in adoption expenses that would not be covered by the credit or exclusion.
If your final cost is $20,000 and your employer pays $10,000, you can exclude the $10,000 from your taxable income. The amount you can claim for the adoption tax credit is $10,000 ($20,000 total expenses – $10,000 employer reimbursement).
Note: Your employer will add your adoption benefits to Form W-2, but you’ll need to complete Part III of Form 8839 and include the form with your return.
Are donations for adoption tax-deductible?
Not everyone is able to adopt a child, but supporting organizations that raise money for adoptive families is another way to help. To assist a family with their adoption-related expenses, donate to an IRS approved 501(c)(3) organization. The IRS labels such organizations as “charitable.” If an organization falls into the 501(c)(3) category, your donation can probably be taken as a tax write-off as long as you itemize your deductions. Under the Tax Cuts and Jobs Act, the amount you can deduct for charitable contributions was increased to 60% of your AGI beginning in tax year 2018.
This article has been updated for tax year 2018 (returns filed in 2019).