What is an adoption credit?
An adoption credit is a federal tax credit that a taxpayer may claim if he or she has recently adopted a child that qualifies for the credit. The taxpayer must have spent money on qualifying expenses, such as travel expenses, adoption fees, and attorney and court fees.
To take advantage of an adoption credit, the taxpayer must fill out Form 8839, called “Qualified Adoption Expense,” when filing his or her federal taxes and submit the appropriate adoption documents.
The form requires the taxpayer to fill out personal information about the child and the adoption process such as the child’s name and birth date, whether he or she has special needs and whether the child was born outside the U.S.
Once completed, the form will specify how much of an adoption credit the taxpayer can receive. In some cases, the taxpayer’s employer may provide adoption assistance, which can reduce the amount of the adoption credit.
However, the taxpayer does not have to claim the employer’s assistance as income when filing his or her federal taxes. While the credit is nonrefundable, the taxpayer can carry any excess forward for up to five years.
In 2017, any adoption finalized that year may be eligible for an adoption credit of up to $13,570 per child. Families who made less than $203,540 can claim the full credit, while those above $243,540 are not eligible to claim the credit. Those who fall between $203,540 and $243,540 may apply for a partial credit.
The only exception to the income requirement is when the adopted child has special needs. Adoption of a stepchild or a child over the age of 18 who is mentally and physically able to care for himself or herself does not qualify for the credit.
Adoption credit example
A woman adopted a child in 2016. Her employer withheld $5,000 from her paycheck, and her tax liability for that year for was $6,000, meaning she would normally owe the federal government $1,000 at the time she files her taxes. With an adoption credit of $13,570, she will not have to pay that $1,000 and will receive a tax refund for the $5,000. She can carry over the remaining $7,570 through 2021.
If you have recently adopted or given birth to a child, there is no time like the present to open a savings account for his or her future.