Everything You Want to Know about the Federal Adoption Tax Credit

In light of the recent vote to make the Federal Adoption Tax Credit permanent I have updated some of the information here. We will continue to update as more details are released.

We receive A LOT of questions about the Adoption Tax Credit and I wanted to compile as much information as possible for you.

While this should give you a basic understanding of the credit I encourage you to talk to a tax professional about your personal situation if you have specific questions.

The Federal Adoption Tax Credit

Taxpayers who adopt a child domestically or internationally may qualify for the adoption tax credit.

You qualify for the adoption tax credit if you adopted a child and paid out-of-pocket expenses relating to the adoption. The amount of the tax credit you qualify for is dependent upon how much money you spent on adoption-related expenses. If you adopt a special needs child through the State you can claim the full amount of the adoption credit, even if your out-of-pocket expenses are less than the tax credit amount.

The adoption credit is calculated on Form 8839 Qualified Adoption Expenses (PDF). You may claim an adoption credit of up to $12,770 (preliminary estimate for tax year 2013) per eligible child.

Adoption Tax Credit Amounts

2013: $12, 770 (estimated)
2012: at least $12,650, non-refundable
2011: $13,360, refundable
2010: $13,170, refundable
2009: $12,150, non-refundable
2008: $11,650, non-refundable
2007: $11,390, non-refundable
2006: $10,960, non-refundable

Adoption Tax Credit Phase-out Ranges

2013 The credit begins to phase out at incomes above $190,000.

2011: $185,210 – $225,210
2010: $182,520 – $222,520
2009: $182,180 – $222,180
2008: $174,730 – $214,730
2007: $170,820 – $210,820
2006: $164,410 – $204,410

The IRS provides a worksheet for figuring your modified adjusted gross income for the adoption credit in the Instructions for Form 8839. Any income excluded from tax using the Foreign Earned Income Exclusion must be added back for the purposes of determining the phase-out range for the adoption credit.

Adoption Credit Refundable in 2010 and 2011

The adoption credit was scheduled to sunset at the end of 2010. However, the massive health care reform legislation extended and revised the adoption tax credit. The health care legislation also enhanced the adoption tax credit in three ways. First, it bumped the maximum adoption credit from $12,150 to $13,170. Second, it extended this increased tax credit amount to the year 2011. Third, it made the adoption credit refundable which meant a full payout for adoptive families. This caused many issues for the IRS and families receiving their returns and many having to send in proof of expenses and documentation for their adoption. There are still families today that are working on receiving their 2011 returns. The Tax Relief Act extended increased dollar amounts for an additional year, through 2012.

Adoption Tax Credit Eligibility Requirements

To be eligible for the adoption credit, you must:

• Adopt an eligible child, and
• Pay qualified adoption expenses out of your own pocket.

Eligible Children include:

• any child age 17 or younger, or
• a child of any age who is a US citizen or resident alien and who is physically or mentally incapable of caring for himself or herself.

Qualified Adoption Expenses are calculated by:

• Adding up all the expenses related to the adoption,
• Subtracting any amounts reimbursed or paid for by your employer, government agency, or other organization.

Adoption expenses include any and all costs directly relating to your adoption and that are reasonable and necessary for your adoption. Expenses include adoption fees, legal fees, court costs, and travel expenses.

Taxpayers who adopt a special needs child can claim the full amount of the adoption credit without regard to the actual expenses paid in the year the adoption becomes final.

Eligible expenses must be “directly related” to the adoption of an eligible child. This may include adoption fees, legal fees, and court costs. Expenses for a failed adoption might qualify for the credit if followed by a successful adoption, but the two adoption efforts would be considered as one adoption and subject to the dollar limit per eligible child. The editors of JK Lasser’s Your Income Tax advise:

“Do not include expenses paid or reimbursed by your employer or any other person or organization. You may not claim a credit for the costs of a surrogate parenting arrangement or for adopting your spouse’s child.” (page 469)

When to Claim the Adoption Credit

What year you can claim the adoption credit depends on when the adoption was finalized and whether the adopted child is a US citizen, resident alien, or foreign national.

If the child is a US citizen or resident alien, then you take the adoption credit in the following order:

• for expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid,
• for expenses paid in the same year that the adoption is final, you take the adoption credit in the same year, and
• for expenses paid in the year after the adoption is final, you take the adoption credit in the year the expenses were paid.

For example, you adopted a child in 2009, but you paid adoption expenses in 2008, 2009, and 2010. Your 2008 expenses are taken on your 2009 tax return (they must be delayed by one year because the adoption was not final). Your 2009 expenses are taken on your 2009 tax return (because they occurred in the same year as the adoption became final). You take your 2010 expenses on your 2010 tax return. In this example, your 2009 adoption expenses include costs incurred in both 2008 and 2009.

If the child is a foreign national, then you take the adoption credit only in the year when the adoption becomes final. Any expenses paid in the year after the adoption is finalized, you can take a credit for those expenses in the year that you paid them.

If your adopted child does not yet have a Social Security Number, you must apply for an Adoption Tax ID Number (ATIN) in order for you to begin claiming your adopted child as a dependent. The IRS provides comprehensive information on the Adoption Taxpayer Identification Number.

Carrying Forward the Adoption Credit

Any adoption credit in from 2009 and before or 2012 and after that was in excess of your tax liability can be carried forward to the subsequent tax year. Excess adoption credits can be carried-forward for five years and is used up on a first-in, first-out basis.

Adoption Tax Credit Resources

• Internal Revenue Code Section 23 (Legal Information Institute, Cornell Law School)
• Adoption Credit (Tax Topic 607 from the IRS)
• IRS Audit Guidelines and Required Documentation (from the Internal Revenue Manual)

[HT: William Perez]