Adoption Tax Credit: Everything You Need to Know
Adopting a child can be an incredibly rewarding experience, but it can also come with significant financial costs. Fortunately, the United States government provides tax credits to help offset some of these expenses. In this article, we’ll go over everything you need to know about the adoption tax credit.
What is the Adoption Tax Credit?
The adoption tax credit is a non-refundable tax credit that helps adoptive parents cover certain expenses related to adopting a child. This includes both domestic and international adoptions.
How Much is the Adoption Tax Credit?
For 2021, the maximum amount for the adoption tax credit is $14,440 per child. However, this amount may vary depending on your income and other factors.
Who Qualifies for the Adoption Tax Credit?
To qualify for the adoption tax credit, you must meet several criteria:
– The adopted child must be under 18 years old or have special needs.
– You must have incurred qualifying expenses related to adopting a child.
– You must have completed an eligible adoption.
– Your modified adjusted gross income (MAGI) must fall below certain limits.
For 2021, the MAGI phase-out range starts at $216,660 and ends at $256,660. If your MAGI exceeds $256,660 in 2021, you are not eligible for any part of the credit.
What Expenses are Eligible for the Adoption Tax Credit?
Qualifying expenses include:
– Reasonable and necessary adoption fees
– Court costs and attorney fees
– Travel expenses (including meals and lodging)
– Re-adoption expenses relating to foreign adoptions
However, there are some limitations on what types of expenses qualify for this credit. For instance:
– Expenses paid by your employer or reimbursed by another source are not eligible.
– Any expense funded through state or federal programs cannot be claimed as part of this credit.
– Expenses incurred in surrogate parenting arrangements are not eligible.
How to Claim the Adoption Tax Credit?
To claim the adoption tax credit, you must file Form 8839 with your federal income tax return. You will also need to provide documentation that proves your qualifications for this credit and shows the expenses you incurred.
It’s important to keep detailed records of all expenses related to your adoption. This includes receipts, invoices, contracts, and travel documents. The IRS may ask for these documents as proof of your eligibility for this credit.
When Can You Claim the Adoption Tax Credit?
You can claim the adoption tax credit in the year after you incur qualifying expenses or when your adoption is finalized (whichever comes first). If you have more qualifying expenses than what can be claimed in a single year, you can carry forward any remaining amount for up to five years.
For example, if you adopted a child in 2020 but did not incur enough qualifying expenses to use up the full $14,440 tax credit that year, you could carry over any unused portion into future years until it is used up.
Can You Receive Cash Back from the Adoption Tax Credit?
The adoption tax credit is non-refundable. This means that if your income tax liability is less than the amount of your qualified adoption expenses, you cannot receive cash back from this credit. However, any unused portion can be carried over into subsequent years until it has been fully utilized or expires after five years.
What Changes Were Made to The Adoption Tax Credit Under The New Tax Law?
In December 2017 President Trump signed major changes into law regarding taxes including changes affecting adoptive parents. Prior to passage of this new law adoptive parents were allowed a maximum dollar-for-dollar reduction against their federal income taxes owed equal to $13,570 per adopted child.The new law increases this maximum allowable deduction amount by $870 (to $14,440) beginning January 1, 2021. With this change the maximum tax credit available will be $14,440 per child.
Do You Need to Use An Accountant?
Although you do not need an accountant to claim the adoption tax credit, it may be helpful if you have complex financial situations or other types of income that could impact your eligibility for the credit. An experienced accountant can help ensure that all of your documents are in order and that you receive the full benefit of this credit.
Conclusion
The adoption tax credit is a valuable resource for families who are looking to adopt a child. By providing a non-refundable tax credit for qualifying expenses related to adopting a child, the government helps make adoption more affordable for many families across America.
If you’re considering adopting a child or have already completed an eligible adoption, be sure to take advantage of this valuable tax benefit by keeping detailed records and filing Form 8839 with your federal income tax return.