Adoption can be a long and expensive process, but the good news is that there are tax credits available to help offset some of those costs. The Adoption Tax Credit has been around since 1997 and can provide significant financial relief for families who adopt a child.
What is the Adoption Tax Credit?
The Adoption Tax Credit is a non-refundable tax credit that helps adoptive families cover qualified adoption expenses. This includes things like adoption fees, court costs, attorney fees, travel expenses, and other related expenses. The maximum amount of the credit varies each year but for 2021 it’s $14,440 per child.
Who is eligible for the Adoption Tax Credit?
To be eligible for the Adoption Tax Credit, you must have adopted a child under the age of 18 or a person with special needs. The credit is also available to families who have started but not yet completed an adoption. If you’re married filing jointly and your modified adjusted gross income (MAGI) is less than $216,660 in 2021 then you’ll receive the full credit. However if your MAGI exceeds this limit then your credit will gradually phase out until it reaches zero at $256,660.
How does it work?
The Adoption Tax Credit works by reducing your federal income tax liability dollar-for-dollar up to the maximum amount allowed per year ($14,440 in 2021). If your qualified adoption expenses exceed this amount then any remaining expenses can be carried forward up to five years until they’re fully used up.
For example: Let’s say you adopted one child in 2021 and had qualified adoption expenses totaling $20,000. You would be eligible for a tax credit of $14,440 (the maximum amount allowed). Any remaining expenses ($5,560) could be carried forward to future years as long as they were incurred within five years of the original adoption.
How do I claim the Adoption Tax Credit?
To claim the Adoption Tax Credit, you’ll need to file Form 8839 with your federal income tax return. This form will ask for information about your adoption expenses and calculate the credit you’re eligible for. It’s important to keep detailed records of all your adoption expenses as well as any documentation related to the adoption.
What if I have an employer-provided adoption benefit?
If you receive an employer-provided adoption benefit then this may affect how much of the Adoption Tax Credit you’re eligible for. Employer-provided benefits are generally excluded from qualified adoption expenses, but they can be used to cover other non-qualified expenses like travel or legal fees.
It’s also worth noting that some employers offer a tax-free reimbursement for qualified adoption expenses up to a certain amount (usually around $14,300 in 2021). If you receive this reimbursement then you won’t be able to claim the full Adoption Tax Credit since it would exceed the maximum amount allowed per year.
In conclusion, adopting a child can be a wonderful experience but it can also come with significant financial costs. The Adoption Tax Credit is designed to help offset some of those costs and make it more affordable for families who want to provide a loving home for children in need. If you’ve adopted or plan on adopting in the future, make sure you take advantage of this valuable tax credit by keeping accurate records and filing Form 8839 with your federal income tax return.