An In Depth Guide To Adoption Credit


Child adoption is an expensive undertaking. The average cost of adopting a foreign or a native child in the United States ranges from $5,000 to $ 40,000. Yet thankfully despite this, 135,000 children find new foster homes in the U.S. every year through adoption. These caring foster parents deserve to be commended for generously opening up their homes and sharing lives in such a beautiful way and the U.S. government definitely agrees.
In the late 90s, the federal government came up with an adoption credit. The aim was to relieve the cost associated with adoption and to encourage more families to adopt children, both from within and outside the United States. Here is everything you need to know about the adoption credit.

Also read: Income Tax Working In Another State

What Is Adoption Credit?

A tax credit is the amount of money that a taxpayer can subtract from government tax. The exact amount is determined by the nature of credit and the regulations governing it. An adoption tax credit is a federal tax credit that can be claimed by taxpayers who forego certain expenses during the process of adopting a child.
The total amount of adoption credit allowed is slightly adjusted every year. In 2018 the sum was $13,840, and in 2019 the total went up to 14,080 per child. To benefit low-income earners, any excess on the tax liability can be carried forward for a maximum of five years. The adoption credit is not refundable; federal taxpayers can only benefit from the credit if they have federal income tax liabilities.

Also read: How Much Is Social Security tax?

Eligibility For Adoption Credit

Who can qualify for the adoption tax credit? You can only qualify for adoption credit if you have incurred personal expenses in the effort to adopt a child. An eligible child must be below 18 years of age or is physically or mentally incapable of self-care. The adopted child can be a U.S. citizen, a resident alien, or a non-resident alien.
The credit applies to all the necessary and reasonable expenses incurred in the adoption process that can be proven. They may include adoption charges, attorney fees, court fees, travel expenses, lodging, and any other spending related to adopting the child. You cannot claim credit for the following expenses:

  • The cost of adopting your spouse’s child (step-child)
  • Payments that violate the federal or state law
  • Expenses paid by funds from the state, the federal government or local programs
  • Expenses that are reimbursed by your employer or other parties

How Does Your Income Affect the Credit Benefit?

The benefits you get from the credit depends on your federal tax liability, which is determined by how much you earn. Taxpayers with very low income may not benefit at all from the credit because it is non-refundable. The credit begins to phase out for high-income earners with a Modified Adjusted Gross Income (MAGI) of between $211,160 and $251,160; earners in this bracket can claim partial credit.
Families earning MAGI below $211,160 can claim the full amount of adoption credit, but the benefits depend on the tax liability within the specific income range. Taxpayers with a modified adjusted gross income of above $251,160 cannot claim any amount of the credit. The partial and complete phasing out of high-income families was introduced in 2017.
These figures are continually adjusted every year, just like the value of the credit itself.

Also read: Payroll Tax Vs Income Tax - The Ultimate Guide

Adopting A Child With Special Needs

Adopting a special needs child automatically qualifies for entitlement to claim the total amount of the credit. This is true even if the total sum of the credit value is higher than the expenses or if no costs were incurred at all. For a child to qualify for special needs, he/she must be a United States citizen or a resident.
The welfare agency must rule that the child cannot be returned to his/her previous home, whether a foster or parents' home. The state must also declare that the adopting family requires assistance on the adoption. Certain cases of physical or mental disabilities do not count as special needs. However, not all children adopted from foster care are considered special needs cases.
In fact, only 10% of children adopted from care need the help of adoption assistance programs. For adoption credit, special needs adoptions must be beneficiaries of adoption subsidy. This provision is given regardless of the figures on your paystub and is aimed at encouraging foster parents to adopt needy children.

Also read: Do You Have To Pay Back FAFSA?

What If the Adoption Fails?

Child adoption is not an easy process; most attempts are actually unsuccessful. If you have already incurred expenses and failed to adopt an American child, then you are eligible for an adoption credit claim on those expenses. Any expenses incurred in an unsuccessful attempt at adopting a foreign child are not qualifying expenses. In that case, a claim cannot be made.

How To Claim Adoption Credit

To claim the adoption credit, you must submit IRS’ file 8839, the adoption papers, and the qualified adoption expenses together with your tax return. You are advised to keep original copies of the receipts proving the expenses as records. On form 8839, you will fill in the name of the child and his/her birth year and indicate whether or not the child has special needs, is disabled, or is foreign.
You may claim the credit the year after you adopt or attempt to adopt a U.S. child. If you finalize the adoption in the same year, you can make a claim in that same year. In the case of a foreign child, you can only make a claim in the following year after the process is finalized. Taxpayers can also make claims on domestic adoptions that are not finalized or are still ongoing.

Start Claiming Your Adoption Credit

Thousands of American families claim adoption credit every year. It is a generous way for the government to show appreciation for those who take it upon themselves to provide homes for unfortunate children. If you are eligible for adoption credit, it is never too late to claim the benefits. Even if you don't have any federal tax obligations, you should make a claim and forward it to later years.
Although the credit is currently non-refundable, this may very well change in the future. We salute all those generous and loving families that consciously decide to adopt a child and make him/ her part of their family. Let us help you create a paystub to prove your income and speed up the process. It's fairly simple.

Frequently Asked Questions

Yes, if your adoption credit exceeds your tax liability, you can carry forward the unused credit for up to five years or until it is fully used, whichever comes first.

Yes, you can claim adoption credit for a foreign adoption. However, the credit can only be claimed in the tax year the adoption becomes final. Additionally, the child must be eligible as a U.S. citizen or resident.

No, adoption credit is not available for adopting a stepchild. It is only available for the adoption of an eligible child who is not the taxpayer's spouse's child.

To claim adoption credit, you need to complete IRS Form 8839 (Qualified Adoption Expenses) and attach it to your Form 1040 (U.S. Individual Income Tax Return).

For tax year 2021, the maximum adoption credit is $14,440 per child. The credit amount may vary depending on the taxpayer's income and actual adoption expenses.

Adoption credit is a non-refundable tax credit, which means it can only reduce your tax liability to zero. Any remaining credit amount cannot be refunded to you.

Qualifying adoption expenses include adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the legal adoption of an eligible child.

Adoption credit is a non-refundable tax credit available to taxpayers who have adopted a child, aimed at helping offset the expenses related to the adoption process.

For 2021, the income limit for adoption credit starts to phase out if your MAGI is above $216,660 and is completely phased out if your MAGI is $256,660 or more.

U.S. taxpayers who have adopted a child and have qualifying adoption expenses are eligible for adoption credit, as long as their modified adjusted gross income (MAGI) is below a certain threshold.
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An In Depth Guide To Adoption Credit
James Wilson

After graduating from McCombs School of Business in Texas, James joined ThePayStubs as a CPA to make sure the numbers we provide our clients are correct. Read More

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