The adoption tax credit is a credit of up to $14,300 that covers qualifying adoption expenditures. This credit applies for every child adopted, whether through domestic private adoption, overseas adoption, or public foster care. Here’s everything you need to know about the adoption tax credit!
Credit Amount
In 2020, taxpayers were eligible for a tax credit of up to $14,300 for all qualified adoption costs. The maximum credit is indexed for inflation. Taxpayers may additionally deduct from income eligible adoption expenditures paid or reimbursed by an employer up to the same limit as the credit. The same expenses cannot be claimed for both the tax credit and the income exclusion by the same taxpayer.
Regardless of actual out-of-pocket expenditures, “special needs” adoptions automatically qualify for the maximum credit. A child is considered to have special needs if the state’s welfare department judges that a child cannot or should not be returned to his or her parents’ home and that the kid is likely to be unadoptable without support for the adoptive family. This policy encourages parents to adopt children who would otherwise be difficult to place, even if some other party pays for the majority of the adoption costs (such as a public foster care program).
Eligibility
The majority of adoptive parents are eligible for the adoption credit, with a few exceptions. Taxpayers with incomes that are higher than specific limits are not eligible for the credit.
These thresholds have an inflation index. The credit phase-out in 2020 starts at $214,520 in modified adjusted gross income and ends at $254,520 in income. In addition, adoptions of stepchildren do not qualify for the credit.
Qualified Expenses
Qualified adoption expenditures include:
- Adoption fees
- Legal fees and court costs
- travel expenses related to the adoption process, such as food and lodging
- Additional costs directly connected to the legal adoption of an eligible kid.
Expenses may be deducted even if they are paid by the taxpayer before an eligible child is determined. As an example, some prospective adoptive parents spend money on a home study at the start of the adoption procedure. The costs count as claimable adoption expenditures for parents.
The cost of adopting a spouse’s child is not included in the list of qualified adoption expenses. However, if the registered domestic partner lives in a state that permits a same-sex second parent or co-parent to adopt their partner’s child, then the adoption costs that the partner paid may be included.
Refundability
Although the adoption tax credit cannot be returned, it can be carried over for a maximum of five years. The credit is consequently of little or no benefit to low-income households that pay little or no income tax over a period of years.
Who Gets the Adoption Tax Credit
The credit is distributed to households according to their income, ranging from modest amounts for low- and moderate-income households (because of their low tax obligations and the credit’s non-refundability) to considerable amounts for upper-middle-class households (due to the income cap).
Tax filing can be a stressful process. We hope this guide gave you some insight into what an adoption tax credit is and how you may be eligible. Reach out to Protect Wealth for the best tools and services for income tax reduction, and check out our 3-day summits where you can learn all about how to lower your income taxes significantly!
