Adopting a child is one of the most consequential decisions you will make in your lifetime. It can also be one of the most expensive. Understanding your financial rights and responsibilities before you adopt is the first step in the journey.
At Cook Martin Poulson, we help clients who adopt children to understand their tax obligations. One of the most common questions we hear is this:
Is there a Utah adoption tax credit?
We’ve created this guide to help you understand the federal adoption tax credit, the Utah adoption tax credit, and how they both work.
What is the Adoption Tax Credit?
According to the Internal Revenue Service, the Adoption Tax Credit is a credit designed to offset the qualified adoption expenses paid to adopt an eligible child. Qualified adoption expenses include:
- Reasonable and necessary adoption fees
- Adoption-related court costs and attorney fees
- Travel expenses, including expenses for lodging and meals, while away from home
- Other expenses that are related to, and for the principal purpose of, adopting a child
The IRS goes on to clarify that qualified adoption expenses may also include expenses incurred before an eligible child has been found or identified. In other words, if you begin the adoption process and pay an agency fee or an attorney fee before finding a child to adopt, those expenses are still eligible for the credit.
How Does the Adoption Tax Credit Work?
The Adoption Tax Credit works like most other tax credits. You may deduct the credit on your federal tax return. The credit can be carried over for up to five years if necessary. In other words, if you incur expenses related to the same adoption over two years, you may take part of the credit in the first year and the other part in the second. You must carry over the credit if taking a portion of the credit reduces your taxes to zero because the adoption tax credit is classified as non-refundable.
The maximum adoption tax credit allowable in 2020 is $14,300. The credit phases out at higher income levels, beginning at $214,520 and phasing out completely at $254,520. You should also know that if your employer offers reimbursement for adoption expenses, you may exclude the amount reimbursed from your taxable income. However, you may not include reimbursed expenses when calculating eligible Adoption Tax Credit expenses. In other words, if you paid $14,080 in total expenses and your employer reimbursed you for $5,000, you would deduct the $5,000 from your eligible expenses and reduce the credit amount to $9,080.
Does Utah Offer a State Adoption Tax Credit?
Currently, the state of Utah offers a $1,000 tax credit for families who adopt a child with special needs. The maximum credit is $1,000 per tax year even if more than one child with special needs is adopted. You can find information about the existing tax credit on page 24 of this document.
Who Qualifies for the Adoption Tax Credit?
The full federal adoption tax credit is available to any family earning less than $214,300 and partially available to any family earning less than $254,520 but greater than $214,300. As a reminder, the current maximum federal tax credit allowable is $14,300. It is important to note that families adopting children with special needs may take full credit regardless of income.
The adoption tax credit is nonrefundable. That means that if taking the full credit would result in a negative tax burden and a refund, you will need to spread the credit out over the next five years.
You should also know that if you incur expenses for an adoption that isn’t successful, those expenses are eligible for the credit. However, if you then have a successful adoption, you must aggregate the expenses for the credit. If you spent $4,000 on an adoption that fell through and $12,000 on a successful adoption, you would need to deduct the $4,000 (if you took it as a credit in a previous year) from your credit for the successful adoption.
How to Claim the Adoption Tax Credit
Claiming the federal adoption tax credit requires the following:
- Completion of Form 8839
- Attaching Form 8829 to Form 1040, 1040-SR, or 1040—NR.
Make sure to report any employer adoption assistance you received. Remember, you may not include reimbursed expenses in calculating the Adoption Tax Credit.
For the Utah adoption tax credit for special needs adoptions, there is no required form. You may simply take the credit on your state tax return when you file your taxes.
When Can I Claim the Adoption Tax Credit?
You can claim the Adoption Tax Credit in any year when you incur qualified adoption expenses. The most important thing to remember is that neither the federal adoption tax credit nor the Utah adoption tax credit is refundable.
If you incur some adoption expenses in one year and finalize the adoption in the following year, you may take part of the credit in the first year and the remainder in the second. You may not take the full credit if it would lead to a refund, but you may carry over the credit for up to five years.
What is the Current Status of the Adoption Tax Credit?
The status of the federal Adoption Tax Credit is as we have stated here. The maximum credit allowable for 2020 is $14,300 and the credit may be taken all in one year or spread out for up to five years. It is a non-refundable credit.
The Utah adoption tax credit currently stands at a maximum of $1,000 for families making up to $160,000 per year who adopt a child with special needs.
Adoption Tax Credit FAQ
Let us answer a few more questions for you regarding the Adoption Tax Credit.
What are the qualified adoption expenses?
Qualified adoption expenses are any expenses related to the adoption of an eligible child. For the federal tax credit, eligibility is broad and includes most adoptions. The only exclusions are the adoption of step-children and families making more than the maximum income allowance.
Qualified expenses include adoption fees, legal fees, court fees, food, lodging, and any other expenses related directly to the adoption.
What is the maximum credit amount?
The maximum credit amount is $14,300 per child for 2020. In Utah, the existing credit is $1,000 and applies only to families adopting a child with special needs. The federal credit is a per-child credit and the Utah credit is a per-year maximum regardless of how many children you adopt.
What if I adopt my partner’s child but we are not married?
If you adopt the child of a partner who is not your spouse, you are eligible for the federal adoption tax credit. You may be eligible for the Utah adoption tax credit if the child you adopt has special needs.
Is the tax credit for all adoptions or just special needs?
The federal adoption tax credit is for all adoptions except for the adoption of a step-child. The existing Utah adoption tax credit is only for children with special needs.
Is there a limit to the number of credits I can claim if I adopted multiple children?
On the federal level, the only limitation is that you may not get a refund because you took the tax credit. As we stated above, you may spread the tax credit out over five years. You may take up to the full credit for any eligible child you adopt.
The Utah adoption tax credit as it stands is far more restrictive. It applies only to special needs adoptions and your maximum annual credit is $1,000.
Taking the federal and Utah adoption tax credits can help to offset the expenses of adopting a child and reduce your tax burden. Not sure if you’re eligible for the adoption tax credit? A Cook Martin Poulson professional CPA has experienced in preparing adoption tax credit claims to assist you.