Adoption tax credit is a government sop for helping people adopt children. But can you claim adoption tax credit before finalization of adoption, or does it happen afterwards? The answer is that you cannot, and we have provided more details below.
It’s estimated that 153 million worldwide children are orphans. Adoption is an effective way to give new life to the children. But unfortunately, the adoption of a child is expensive. If you wish to become an adoptive parent through a private agency, then it may cost yo
The Government of the United States supports adoption and has established adoption tax credit as a way to incentivize the adoption effort. But can you claim adoption credit before finalization?
If you think of adopting a child from the United States, then you can claim the tax credit immediately after the year you spent money on the adoption process. But for International adoption, you can claim the tax credit only after the child adoption process is finalized.
The article discusses more about the adoption tax credit. So keep reading the article for more information.
What Is Adoption Tax Credit?
If you want to become and adoptive parent, then you have to bear the expenditure of court fees, adoption agency, attorney fees, and various others, which can go above $40,000.So the IRS provides some relief to the cost spent during the adoption process and offers an adoption tax credit.
The taxpayers can claim 100 percent of the qualified expenses spend during the adoption process. But the maximum amount of tax credit for one eligible child is $14,890.The amount of tax credit varies from one year to another. This is the dollar limit of the credit. There is also an income limit which we will explain later.
So, if you become and adoptive parent to one child, then you can claim a tax credit for $14,890. Similarly, if you adopt two children, you can apply for a tax credit of $29,780, and if you adopt four children, you can apply for a tax credit of $59,560.
You can adopt any number of children you want and apply for the tax credit. The IRS has not set any specific limit for adopting children. Moreover, these tax credits are available for all types of adoptions, including domestic adoption, foreign adoption, and public/private foster care. Only thing that is excluded is stepparent adoption
Now, if a couple spends $16,000 while adopting a child legally. They spend $4000 in 2019, $6000 in 2020 and $5000 in 2021. So they can claim a tax credit for $10,000 in 2020 and $4,890 in 2021. Any expenditure above $4890 will not be eligible for tax credits.
You might also like to read: How To Adopt A Child From The Philippines To the USA?
How Much Is The Adoption Tax Credit?
The amount of adoption tax credit you can claim depends on the qualified adoption expenses spent during the child adoption process. For instance, if your qualified adoption expenses are $8000 during the child adoption process in 2021, you cannot claim the maximum adoption credit, i.e., 14,890.
But if you spent $26,000 in the child adoption process in 2021, then you can claim tax credits up to $14,890. The adoption tax credit is nonrefundable by nature, which means if you cannot use the maximum tax credit in the first claiming year, you can carry it forward for the next five years.
For instance, if you have a claim for ,maximum credit, i.e., 14,890 but have a tax liability of $10,000, you will get a tax credit only of $10,000. The remaining $4,890 will roll down to the next year for adopting an eligible child.
Who Qualifies For Credit?
You can get an adoption tax credit if you spend out-of-pocket qualified adoption expenses while adopting a child. However, the child should be below 18 years old. If the child is above18 years old, then he should have a mental or physical disability.
The child may or may not be a citizen of the United States. But if you wish to adopt a child in the United States, then you can claim the tax credit each year before finalization. The maximum tax credit for one adopted eligible child will be $14,890 as of 2022.
But, if you have a high taxable income, you are not eligible for the tax credit. The adoption tax credit will be subject to exclusion and start phasing out if your modified adjusted gross income is above $223,410 as of 2022. The tax credit will completely phase out if your modified adjusted gross income is $263,410 as 2022.
The taxpayers whose modified adjusted gross income is within the phase-out can use the following formula
($263,410-Modified AGI)40,000 14,890
For instance, if a couple spends $18,000 on the child adoption process and their modified adjusted gross income is $230,000, their tax credit will be $12,436.
When Can You Claim The Tax Credit?
The adoption process can be extended. It may take two to three years while adopt a child legally.
If you are thinking of adopting a United States child, you can claim a tax credit just after the year you have to spend money in the adoption process in your tax return. But if you finalize the child adoption process in the same year, you can claim the tax credit in the same year.
But for foreign child adoption, you can claim the tax credit only after finalization.
What Can Credit Be Used For?
You can use the adopted tax credit to meet the money spent during the child adoption process like traveling (including lodging and meals), court fees, attorney fees, adoption fees, and other costs directly related while adopting a child legally. But you cannot claim a tax credit if
- You are spending money to adopt your spouse’s child.
- Making payments to a surrogate parent.
- The fees violate the laws of the State
- The charges which you can reimburse from your employer
- The payments you have made using the funds you receive from Government, State, or any local program.
How Do You Claim The Tax Credit?
You should complete IRS form 8839 while filing a claim for tax credit and include it in your federal income tax return. In case your child has not received their social security number, you will also have to file for an ATIN. In most cases, the social security number comes only after adoption is completed.
Ensure to keep all the paperwork and documentation related to child adoption for records. However, you don’t need them while filing your federal income tax liability.
Some states in the United States offer adoption tax credits. You can use it to reduce your State income tax. However, the amount of the tax varies from one State to another.
You might also like to read: What Does An Adoption Lawyer Do?
What If Adoption Is Unsuccessful?
If you want to adopt a child who is a citizen of the United States, you can claim the full tax credit, i.e., $14,890 as of 2022, even if the adoption process is unsuccessful.
But if you want to adopt a child who is not a citizen of the United States, you are allowed to claim the federal adoption tax credit only after finalization.
Adopt Child With Special Needs
If you are thinking of special needs adoption, then you can claim the entire tax credit, i.e., 14,890, as of 2022, even if you have spent less than 14,890.
For instance, if you have spent $10,000 while adopting a child with special needs, then you can claim a tax credit for $14,890.
A child can qualify as special needs if
- The child is the resident of the United States
- The State realizes that the child will not return to the parent’s home.
- The State realizes that the child cannot be adopted unless help is provided.
Suppose you are not sure whether your child falls under the special category or not. In that case, you can review the paperwork or consult with your certified adoption agency or any social worker.
How Can I Show Proof Of My Adoption Expenditure?
Try to have a copy of the adoption certificate. It should be signed by the judge and should have your name, spouse’s name, and the child to whom you have adopted along with the stamp of the court. Earlier, you had to attach this certificate while filing taxes.
But now IRS doesn’t require attaching the adoption certificate. But still, I will advise you to keep it for the record, and whenever it’s needed, you can prove it.
Frequently Asked Questions
#1. Can you claim adoption expenses on taxes?
Yes, adoptive families can claim legal adoption expenses on taxes. Taxpayers can get a tax credit of $14,890 for spending money related to child adoption.
#2. Is adoption tax credit ever refundable?
No adoption tax credit is a nonrefundable credit. No doubt the tax credit helps many adoptive families, but it could help many more families if it had been refundable.
#3. Does the adoption credit carry forward?
Yes, the adoption credit can carry forward for five years. For instance, if you claim the full adoption credit, i.e., $14,890 as of 2022, and the tax liability is $10,000, then $4890 will roll to almost five years for adopting an eligible child. However, it is only a one-time credit, it cannot be claimed multiple times. Once exhausted, this credit cannot be reclaimed or carry forwarded.
#4. When can you claim an adopted child on your taxes?
If the adopted child is born in the United States, you can claim adopted tax credit the year after you spend money on adoption, like attorney fees, court fees, and others.
A Few Final Words
Every child deserves a family who will care for him and provide basic needs. But unfortunately, there are millions of children who are staying either in orphanages or are homeless. Adoption is a way to help these children and provide a better life for them.
But during the child’s adoption, you have to bear court costs, attorney costs, and various others, which may be hard for you. But IRS realizes your hardships and introduced an adoption tax credit by which you can claim almost $14,890 for each eligible child.
We thank you for reading the article and hope we have covered everything related to adoption tax credit in this article. If you have more queries, please feel free to write to us in the comments box below.