What is the adoption tax credit?
You may be able to claim a tax credit for expenses you paid to adopt a child. In 2021, you can claim an adoption tax credit of up to $14,440 (up from $14,300 in 2020) of qualified adoption expenses per eligible child (including a child with special needs). Use IRS Form 8839 to claim the credit.
- Tip: A tax credit represents a dollar-for-dollar reduction of your income tax liability. A deduction, in contrast, only reduces your taxable income.
- Tip: Taxpayers can apply the adoption tax credit against regular tax liability and the alternative minimum tax.
Requirements for the adoption tax credit
To claim the adoption tax credit, you must meet several requirements:
If you are married, you generally must file a joint return to claim the credit. Include the child's name, age, and Social Security number or taxpayer identification number (TIN) on your return. Two limited exceptions to the joint filing requirement are as follows:
- You're legally separated under a divorce or separate maintenance decree, or
- You and your spouse lived apart for the last six months of the year, and
- Your home is the eligible child's home for more than half the year, and
- You pay more than half the cost of maintaining the home for the year
Qualified adoption expenses
Only qualified adoption expenses may be claimed. Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses while away from home, and other expenses directly related to your legal adoption of an eligible child. An eligible child must be either under age 18 or physically or mentally unable to take care of himself or herself.
To qualify as a child with special needs, a child must be a U.S. citizen or resident; further, a state must determine that the child:
- Can't or shouldn't be returned to the birth parents' home, and
- Has a condition or issue that is likely to prevent an adoption unless adoption assistance is provided to the adoptive parents.
Tip: The adoption tax credit (or adoption assistance exclusion, see below) is allowed in the year an adoption of a child with special needs is finalized, regardless of whether the taxpayer has qualified adoption expenses that year.
- Caution: Qualified adoption expenses don't include expenses incurred in adopting a spouse's child or in carrying out a surrogate parenting arrangement.
- Caution: The credit limit is a per-child limit, not a per-year limit.
Phaseout of credit for higher-income taxpayers
In 2021, the credit begins to phase out once your modified adjusted gross income (MAGI) exceeds $216,660 (up from $214,520 in 2020). If your MAGI is $256,660 or more (up from $254,520 in 2020), you can't take the credit at all.
In which tax year can you claim the credit?
The year in which you can claim the credit depends on several factors. The rules vary, depending on whether you pursue a domestic or a foreign adoption, and on whether you adopt a child with special needs.
- Domestic (U.S.) adoptions: If you incur qualified expenses before the year in which the adoption is finalized, you can claim the credit for those expenses the following year. If you incur expenses during or after the year the adoption is finalized, you can claim the credit for them in the same year you pay them.
- Foreign adoptions: The credit is available only if the foreign adoption is finalized. A credit is allowed in the year the adoption is finalized for expenses paid during that year and prior to that year. For expenses paid in a year after the adoption is finalized, you may claim a credit in the year of payment. Therefore, if your adoption of a foreign child was finalized in 2020, but you pay additional qualified adoption expenses related to that adoption in 2021, you can claim a credit for those expenses in 2021.
- Adoptions of children with special needs: The adoption credit is allowed for the tax year in which the adoption becomes final, regardless of whether the taxpayer has qualified adoption expenses that year.
The adoption assistance exclusion
Closely related to the adoption credit is the adoption assistance exclusion. If your employer has an adoption assistance program, you can exclude from your taxable income any qualifying adoption expenses paid or reimbursed by your employer. The per-child limit, the definitions of qualifying expenses and a qualifying child, the phaseout amounts, and the filing status requirements for the adoption credit all apply to the exclusion.
- Tip: You can't claim the adoption tax credit and the adoption assistance exclusion for the same expense. However, you can apply both to the same adoption, as long as you're applying them to different expenses.
- Caution: For domestic adoptions, you can claim the exclusion only in the year your employer provides the reimbursement. You can't claim it in any other year. For foreign adoptions, you can claim this exclusion only in the year the adoption becomes final, for assistance provided by an employer during and prior to that year.
- Example(s): Example 1. You began the process of adopting an American child in 2020. Under your employer's adoption assistance program, you received $2,500 in that same year to cover the adoption fees, court costs, and medical exams. The adoption becomes final in 2021. You can exclude this employer-provided reimbursement from income under the adoption assistance exclusion in 2020, but not in 2021.
Example(s): Example 2. You began the process of adopting a foreign child in 2020. That year, you received $2,500 under your employer's adoption assistance program to cover qualifying expenses. The adoption becomes final in 2021. You must report the $2,500 as income in 2020 and then claim the exclusion in 2021, the year the foreign adoption became final.
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