Adoption Tax Credit Basics In Five Simple Questions

The Adoption Tax Credit is a gift that all families of adoption must not squander.

The credit is the American government’s delayed Christmas present – a reward for adoptive families having weathered such a long, tough, arduous storm to become a family.

You don’t have to be a tax guru to understand the basics of filing for the credit.  And, realizing that your family would much rather be kissing your new little one than reading a dry tax code, I’ve developed a simple Q & A.

This is my attempt at allowing new, adoptive families to bask in the glow of finalization without worry for an impending mountain of tax forms due April 15th.

Below are five, simple questions I’ve been asked about claiming the Adoption Tax Credit –

(1) When am I eligible to claim?

Generally, your family is eligible to claim the credit after your adoption is finalized in the U.S.

Your adoption should be finalized in the year for which you are filing.  Said another way, finalizing before December 31st, 2016 enables your family to claim the credit on your 2016 tax return.

To be eligible to claim, the adopted child has to be under 18 or incapable of self-care.

Expenses associated with the adoption of a spouse’s child are not eligible.

Note: there is a noteworthy exception to this general timing rule for domestic adoptions that will be addressed in item #3 below.

(2) How much can I claim?

For tax year 2016, the maximum tax credit is $13,460 per child.

The credit is meant to defray normal, adoption related costs such as:

  • agency fees
  • court costs
  • traveling expenses
  • other expenses directly tied to an adoption process

Families do not have to submit, but should carefully document, all fees paid to substantiate the total cost of their adoption when filing their claim.

You should understand that there is an income restriction for the Adoption Tax Credit starting at just over $200k per year.

A family that has a Modified Adjusted Gross Income (MAGI) greater than $201,920 for 2016 will not be able to claim the maximum credit.  Those families making between $201,920 and $241,920 will have their tax credit reduced.

A MAGI exceeding $241,920 will not be eligible for the credit.

(3) Are there differences between International and Domestic adoptions?

There are two noteworthy differences between an international and domestic adoption in regard to claiming the tax credit.

First, families in a domestic adoption process can claim the credit the year after they pay for the adoption related expenses regardless of whether the adoption is finalized.

If you paid expenses in 2016 and your domestic process is on-going, you can claim a credit for expenses paid.  Doing so, though, will reduce the maximum available to claim in future years after the adoption is final.

Secondly, a family can file for the Adoption Tax Credit if the adoption for which expense were paid is now disbanded – even if a child was never identified.

If the family claiming such a credit later re-starts an adoption process, the amount of future claims will be reduced by the previous credit claimed.

In either case, the important difference between international and domestic adoptions is related to the timing of filing associated with finalization.

(4) What about grants, gifts or employer assistance that I’ve received during our process?

If a family has received assistance during their adoption process, they must deduct the gifted amount from the total fees paid when computing the amount of credit to claim.

For instance, if the total adoption cost equals $20,000 and the couple used a $10,000 gift from their church community, their maximum, claimable credit amount is $10,000.  Employer assistance and in-kind gifts are handled in the same manner.

Note that the amount of assistance received should be not be included as income for the family.

(5) What if I didn’t pay $13,460 in taxes this year?

If a family is otherwise eligible to claim the entire $13,460 credit, but did not pay that much in taxes, the remaining credit can be used until it reaches the maximum amount for up to five years.

A family that has paid $10,000 of taxes in 2016 and otherwise qualifies for the maximum, will have to wait until next year to collect their remaining, due $3,460.  All eligibility criteria will have to be revisited each tax year when claiming for the remaining credit.

Filing for the Adoption Tax Credit quickly and accurately is important for all families of adoption.  The credit is of critical importance if the family budgeted for this reimbursement when borrowing or cashing in investments on the road to becoming a family.

Understanding the five questions above will help you organize, file and get back to the more important work – enjoying the time with your new son or daughter.

You’ve earned it.

*The above piece should not substitute for individualized, tax advice from a Certified Public Accountant.  Please consult your tax professional if you have specific questions about your own case.


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