The adoption tax credit has helped thousands of couples realize their dream of having a family. The credit has made adoption a more realistic option for many people that otherwise might not be able to afford it. The tax benefits for adoption include both a tax credit for qualified adoption expenses and an exclusion for employer-provided adoption assistance.
The adoption tax credit was made permanent in 2013. This means that there is no specific expiration date but congress can still make changes to it in the future. The maximum amount of the credit for 2015 is $13,400. The credit is a non-refundable credit, which means the credit will go directly against the amount of taxes due on your return. Any excess credit can be carried forward for up to 5 years. Generally the credit is taken in the year the adoption is finalized. If the adoption is not finalized in the same year the expenses are incurred, you can claim the credit on the following year’s tax return.
The credit is for amounts paid towards qualified adoption expenses. Qualified expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and any other expenses that are directly related to the adoption of an eligible child (defined as a child under 18 years of age). Expenses paid by the taxpayer for the adoption of a child of the taxpayer’s spouse cannot be included for purposes of this credit. If your modified adjusted gross income is higher than $201,010, the credit begins to phase out. Taxpayers with income greater than $241,010 will not be able to claim the credit.
Many times, couples go through the process of adoption and incur expenses, only for the adoption to fail. The expenses incurred in a failed adoption can still qualify for the credit. In this case, the expenses are deductible in the year after the payments were made. So if adoption expenses were incurred in 2014, the credit would be claimed on the 2015 tax return.
Adoptions of children with special needs have some different rules. If a child with special needs is adopted, the taxpayer is eligible to claim the maximum amount of the credit, even if they did not pay qualified adoption expenses.
There are many generous employers now that are providing adoption assistance for their employees. In addition to the tax credit, taxpayers are permitted to exclude up to $13,400 from their gross income for amounts received from their employer for adoption assistance.
For example, you pay $30,000 of qualified adoption expenses and your employer reimburses you for $13,400 of those expenses. Assuming you meet all other requirements, you can exclude $13,400 from your gross income and you can claim a credit of $13,400 for 2015. Your total benefit is $26,800. The remainder of the expense cannot be used for either the exclusion or the adoption credit due to the dollar limit.
During the adoption process, you should maintain records of all related expenses. There is no longer a requirement to attach the documentation with your return, but you should keep it as part of your records.
The adoption tax credit can really ease the financial burden for families looking to adopt. For more information on the credit and how it can apply to your family, please contact any of the professionals at our office.
- IRS topic 607-Adoption credit and adoption assistance programs