Adoption tax rules—you could get $1000s in credits

Adopting a child into your family is a profoundly life-changing event. If you or someone close to you has had this experience, you know how many new feelings – love, concern, protection, pride – come into your life.

While the tax benefits of adoption are certainly not as emotional a part of your experience, they are still real.

First, know that there are financial benefits.

You could owe less to the IRS because of tax credits you may be able to take for many adoption expenses. Those expenses can include money you spend on the adoption process as well as some expenses once your child is in your home. You’ll come across the term “qualifying child” when learning about adoption tax rules. We have a handy definition and other key Rules for Claiming Dependents on Your Tax Return ready to help.

Second, the tax benefits for adoption include both the tax credit for qualified expenses paid to adopt an eligible child and money deducted from income if your employer offers adoption assistance. These lower the amount of taxes owed.

Benefit #1 – Taxpayers can claim most adoption expenses

It makes sense that expenses increase with an expanding family. The good news is taxpayers can claim many expenses related to adoption:

• Reasonable and necessary adoption fees
• Court costs and attorney fees
• Traveling costs (including money spent on meals and hotels while away from home)

As with any deduction, be sure to save paid invoices and other receipts. Taxpayers can apply these deductions to both the year that the adoption process began and the year the process is completed, so keep all those receipts in a safe place.

The adoption credit is up to $14,890. That’s for each child. So, for two children, it’s up to $29,870. For three children, it’s up to $44,760, and so on.

Benefit #2 – Adoption Tax Credit

Here’s a benefit that comes with an extra benefit – if your adoption expenses qualify, you can spread the adoption credit out over time. If the amount of the tax credit is more than the taxes you owe, you won’t get the extra amount as a tax refund. However, you can carry the remaining credit over and apply it in subsequent tax years until the credit is used up, or five years, whichever comes first.

For example...

Let’s say you adopted one child in 2022. You qualify for up to $14,890 as a deduction. But, if your total income taxes are $7,000 for 2022, then you can only apply $7,000 of your adoption credit on your 2022 return. That will leave you with no tax bill for 2022, PLUS you can carry over the rest of your tax credit— $7,890—to next year’s tax return -- and keep carrying your tax credit over until you take it all, or for 5 years, whichever comes first.

 That’s a real help when you’re expanding your family.

Benefit #3   - Child Tax Credit

Basically, this allows taxpayers to claim a credit of up to $2,000 for each child under age 16. The credit depends on how income is calculated. Read more at What is the Child Tax Credit and Additional Child Tax Credit? in the Jackson Hewitt Family Tax Tips section and take a look at the I.R.S. Form 8812.

“Good to know” guide

Is your adoption “domestic” or “foreign”?

Qualified adoption expenses can be different, depending on the type of adoption.

A domestic adoption is when a taxpayer adopts a child from the United States. Keep in mind that the adopted child must have been a citizen or resident of the U.S. or its possessions before the adoption process starts.

If the child wasn't a citizen or resident of the U.S. or its possessions before the adoption process began, that is a foreign adoption.

When can taxpayers claim adoption expenses?

The timing rules for claiming deductions are different for domestic and foreign adoptions.

For domestic adoptions, taxpayers can take qualified adoption expenses paid before the year of adoption as a credit for the tax year following the year that they were paid. Taxpayers can claim these credits even if the adoption doesn’t go through.

For foreign adoptions, the credit can be claimed for qualified adoption expenses paid before and during the year when the adoption becomes final.

All adoptions are different, so we recommend that you check I.R.S. guidelines on Adoption Credit and Adoption Assistance Programs and talk to a tax professional.

For example...

You started the child adoption process in 2020 and paid $2,000. In 2022, the adoption failed, but in some cases your expenses are still deductible in the following tax years:

• In 2021 if the adoption is for a U.S. citizen
• In 2022 if the adoption is for a child from another country. You can only claim the expenses if you successfully adopt the child.

What about adopting a special needs child?

The first thing taxpayers should know is how a child qualifies as special needs. Local agencies determine who is special needs. Children who could meet the definition include those with severe physical or mental medical needs as well as children who are hard to place and family groups.

Taxpayers adopting a special needs child could be eligible to claim the full amount of the adoption tax credit in the year they adopted – regardless of their actual expenses.

Employers can be a big help

Employers can provide up to $14,890 of pre-tax adoption assistance. This is separate from the Adoption Tax Credit. Taxpayers can’t use the same expenses for both the employer paid-adoption assistance and their own adoption credit.

What year should taxpayers claim tax benefits?

It can be tricky. Taxpayers should definitely save all of the paperwork: documents, receipts, and anything else related to the adoption. Which tax year claimed depends on:

• When expenses were paid
• Whether it was a domestic adoption or a foreign adoption
• When, if ever, the adoption was finalized

Looking ahead

Adopting is great and a wonderful event all on its own and getting some tax benefits certainly adds to the celebration. Be sure to understand the tax laws that can get you a bigger refund.

Remember, always keep in mind that the IRS is not responsible for making sure you get all your benefits, credits, deductions, or the biggest refund. That’s on you. But you can get the refund you deserve by increasing your own tax knowledge, finding a reputable professional tax preparation service, and investing your own time into the results.

The experts at Jackson Hewitt are ready to help guide you through the tax aspects of adoption. We have additional valuable information available online.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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