What Is An Adoption Tax Credit?
If you’ve adopted a child or you’re considering one in the future, you should know about adoption tax credits.
What is adoption credit? It's a tax incentive for taxpayers who have brought an eligible child into their family and paid out-of-pocket expenses related to the process. These fees include court fees, lawyer fees, and even travel expenses. The amount of your credit is directly related to how much you spend.
Limitations On Income And Dollar Amounts
There are certain limitations on adoption credit that eager parents should be aware of. The income limit for the adoption tax credit in 2020 is based on your modified adjusted gross income, also known as MAGI.
For example, If your MAGI amount for 2019 is between specific dollar amount limits, your adoption tax credit in 2019 or exclusion is subject to a reduction or elimination. For 2019, the modified adjusted gross income phaseout begins at $211,160 and ends at $251,160. This means that if your MAGI amount for 2019 falls under $211,160, your tax incentive isn’t impacted by the phaseout.
The dollar limitation applies separately to both the credit and the exclusion. It’s possible that you can claim both for certain expenses that qualify. That said, you’ll need to claim any allowable exclusion before you claim any allowable credit. Expenses used for the exclusion reduce the number of qualified expenses available for the credit. Keep in mind that you may not claim both for the same expenses.
In order to secure qualified adoption expenses for tax credits, you’ll need to meet certain eligibility criteria. This includes:
- You must adhere to the qualifications for adoption. The child must be 17 years of age or younger, a US citizen or resident alien, and physically or mentally incapable of self-care
- Expenses paid must originate from your own pocket
- You must reduce any amount from your expenses that you were reimbursed for by an agency, government organization, or otherwise
Adoption credit for a special needs adoption is also available. Special needs children include those who generally receive subsidy benefits because they’re already in foster care. These benefits might include Medicaid or reimbursement of other expenses by the state. A disability doesn’t qualify a child as special needs, so you may need to do your homework to understand what qualifies.
It’s important to mention that expenses for an unsuccessful result can still qualify for a tax incentive if a successful adoption occurs thereafter.
Which Expenses Qualify For Adoption Tax Credit?
When you’re undergoing the process, you’ll undoubtedly be inundated with an abundance of paperwork. Take care to remain extra organized and vigilant about keeping your expenditures documented and in a safe place. You’ll need these to assemble the total amount you’ve paid out of pocket.
Qualified adoption expenses for both the credit and exclusion include:
- Expenses related to travel like meals and hotels
- Costs related to court fees and attorney fees
- Home study
- Any other related fees involved in in the process
Other expenses may qualify so long as they relate directly to the legal process for an eligible child. If you assume the child of your spouse, it won’t qualify for this tax incentive.
When’s The Right Time To Claim The Credit?
The credit can be claimed after your expenses are paid. For any expenses that you paid in the year after the process was deemed final, you can take the incentive in the year those costs are paid.
Please note that the regulations for naturalizing a foreign national child are different. The incentive will only be available in the year when the process is officially finalized. If the child hasn’t yet been given a Social Security number, you’ll also need to apply for an adoption taxpayer identification number (ATIN) so that you can register your child as a dependent.
Read more: Best Adoption Loans
Going through the process of adopting a child can be a wonderful and exciting journey. However, it’s important to consider the tax credits you may be eligible for so you can plan how to properly keep track of related expenses.