Adoptive parents around the country may qualify for a tax credit. Parents who either adopted a child or tried to adopt a child may claim the adoption credit. Here are nine things you should know about this credit.
1. Credit
The credit is nonrefundable. This means the credit may only reduce a taxpayer’s tax liability to zero. If the credit is more than the tax owed, the taxpayer can’t receive an additional amount as a refund.
2. Credit Carryover
Taxpayers can carry any unused credit forward to the next year. This happens when the credit is more than the tax owed. In other words, taxpayers who have an unused credit in tax year 2017 can use it to reduce their taxes for 2018. Taxpayers can carry any remaining credits for up to five years, or until they fully use the credit, whichever comes first.
3. Exclusion
If the taxpayer’s employer helped pay for the adoption through a qualified adoption assistance program, the taxpayer may qualify to exclude that amount from tax.
4. Eligibility
An eligible child is:
- An individual under age 18
- An individual of any age who is physically or mentally unable to care for themselves
5. Special Needs Child
Special rules apply to taxpayers who adopted an eligible U.S. child with special needs. The taxpayers may be able to take the exclusion even if they didn’t pay any qualified adoption expenses.
6. Qualified Expenses
Adoption expenses must be directly related to the adoption of the child and must be reasonable and necessary. These include:
- Adoption fees
- Court costs
- Attorney fees
- Travel expenses
7. Domestic or Foreign Adoptions
In most cases, taxpayers can claim the credit whether the adoption is domestic or foreign. However, the rules for which year a taxpayer can claim qualified expenses differ between these two types of adoption.
8. No Double Benefit
Depending on the adoption’s cost, taxpayers may be able to claim both the tax credit and the exclusion. However, they can’t claim both a credit and exclusion for the same expenses.
9. Income Limits
The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount a taxpayer can claim depending on the amount of their income.
Frequently Asked Questions
Who qualifies for the adoption tax credit?
Any taxpayer who has adopted or attempted to adopt an eligible child may qualify for the adoption tax credit, subject to income limitations and specific eligibility criteria.
What does it mean that the credit is nonrefundable?
A nonrefundable credit can reduce your tax bill to zero, but it cannot result in a refund. If your credit amount exceeds your tax liability, you won’t receive the excess as a refund.
Can unused adoption credits be carried over?
Yes. If the adoption credit exceeds your tax liability for the year, the unused portion can be carried forward for up to five years, or until fully used.
What expenses count as qualified adoption expenses?
Qualified expenses include reasonable and necessary costs directly related to the adoption, such as agency fees, court costs, attorney fees, and travel expenses.
Can I claim both a credit and exclusion for adoption assistance?
You may be able to claim both, but not for the same expenses. If your employer provides adoption assistance, you can exclude that from income and still claim the credit for other eligible expenses.