Big Tax Break for Adoptive Parents

Article Highlights:

Qualifying Adoptions
Credit Amount
Credit Carryover
Qualifying Expenses
High-Income Credit Phase-out
Employer Adoption Assistance Program
Failed Adoptions
Foreign Adoptions

If you are an adoptive parent or are planning to adopt a child, you may qualify for a substantial income tax credit. The amount of the credit is based on the expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care.

This is a 1:1 credit, meaning $1 of credit for each dollar of qualified expenses up to a specified maximum for the year, which is $14,300 for 2020 (up from $14,080 in 2019). The credit is nonrefundable, which means it can only reduce tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be used for up to the next five years to reduce future tax liability.

Qualified expenses generally include adoption fees, court costs, attorney fees and travel expenses that are reasonable, necessary and directly related to the adoption of the child. These expenses qualify for both domestic and foreign adoptions. When adopting a child with special needs, the full credit is allowed whether or not any qualified expenses were incurred. A child with special needs is, among other requirements, a child who the state has determined (a) cannot or should not be returned to his or her parents’ home, and (b) a child who won’t be adopted unless assistance is provided to the adoptive parents.

The credit is phased out for higher income taxpayers. For 2020, the AGI phase-out threshold (computed without foreign-income exclusions) is $214,520, and at the AGI of $254,520, the credit is completely phased out. Unlike most phase-outs, this one is the same regardless of filing status. However, the credit cannot be claimed by taxpayers using the filing status married filing separately.

If your employer has an adoption assistance program, up to $14,300 of reimbursements by the employer are excludable from income. Both the tax credit and the exclusion may be claimed, though not for the same expenses.

Failed Adoption - Qualified adoption expenses paid or incurred in an unsuccessful attempt to adopt an eligible U.S. child before successfully finalizing the adoption of another eligible child count for this credit. Unsuccessful and successful adoption attempts are treated as one effort for each eligible child for the purposes of the dollar limit on the credit.

Foreign Adoption - For a foreign adoption, the credit is allowed only in the year the adoption becomes final, and no credit is allowed if the adoption doesn’t become final.

Adopting a Spouse’s Child - Expenses related to adopting a spouse’s child are not eligible for this credit or for an employer’s adoption assistance program.

If you think you qualify for this credit or are planning an adoption in the future, please contact this office for further credit details and to find out how this credit can apply to your particular circumstances.

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Big Tax Break for Adoptive Parents