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Adoption Tax Credits (Federal & State) – Requirements & Eligibility

The decision to adopt a child is a big one for any prospective parent, and one of the concerns often has to do with costs. Adoption-related expenses can vary widely depending on whether you work with an agency, adopt from foster care, work directly with the birth parents, or adopt internationally.

Fortunately, there are federal and state assistance programs that minimize financial obstacles to adoption.

Federal Adoption Tax Credit and Adoption Assistance Programs

The U.S. Tax Code provides two separate assistance programs for prospective adoptive parents. Both programs help cover qualified adoption expenses, which the IRS defines as:

  • Reasonable and necessary adoption fees
  • Court costs and attorney fees
  • Traveling expenses (including meals and lodging while away from home)
  • Other expenses directly related to the legal adoption of a child

To qualify, you must pay the expense to adopt a child under the age of 18 or someone of any age who is physically or mentally incapable of self-care. Qualified expenses don’t include expenses paid to adopt a stepchild.

Adoption Tax Credit

The federal adoption tax credit is worth up to $14,300 per child for the 2020 tax year.

Parents who adopt a “special needs” child automatically qualify for the maximum credit, regardless of their actual adoption expenses. The IRS’s definition of a special needs adoption might differ from definitions used elsewhere.

The adoption must meet all three of the following criteria to qualify as a special needs adoption:

  1. The child was a citizen or resident of the U.S. or its possessions when the adoption effort began.
  2. The state determined that the child can’t or shouldn’t return to their parent’s home.
  3. The state determined that the child probably wouldn’t be adoptable unless it assists the adoptive family financially.

Based on those criteria, foreign adoptions aren’t considered special needs. Also, U.S. children with disabilities might not be regarded as special needs if the state doesn’t consider them difficult to place for adoption.

Income Limitations

However, the amount of the federal adoption tax credit phases out for high-income taxpayers. It begins to phase out once your modified adjusted gross income (MAGI) reaches $214,520 and phases out entirely at $254,520.

The credit phases out proportionally if your income is between $214,520 and $254,520.

So if your income is $234,520 — the midpoint of the phase-out range — the amount of your credit is cut in half. If your income is $224,520 — one-quarter of the phase-out range — the amount of your credit is reduced by 25%.

The income limits apply whether you’re single or married and file a joint tax return with your spouse. The adoption tax credit isn’t available if your filing status is married filing separately.

Refundability

The adoption tax credit is nonrefundable. In other words, if it reduces your tax liability for the year below zero, you won’t receive the excess as a tax refund.

However, you can carry any unused credit forward for up to five years, using it to offset your tax liability in the future.

When You Can Claim the Credit

The rules for claiming the credit depend on whether the adoption is domestic or foreign.

Domestic Adoptions

If you adopt a U.S. child, you can claim adoption expenses for the tax year following the year of payment, even if you never finalize the adoption. However, any costs you used to claim the credit on an unsuccessful adoption will reduce the amount you can claim for a subsequent adoption.

For example, say you started the adoption process in 2018, but the adoption fell through. You used $3,000 of expenses to claim the adoption tax credit on your 2019 return.

In 2020, you made another attempt to adopt, spending $10,000, and successfully finalized the adoption that year. When you claim the adoption credit on your 2020 tax return, you can only claim $7,000 of expenses ($10,000 – $3,000).

Foreign Adoptions

If you adopt a child who isn’t yet a citizen or resident of the U.S. or its possessions, you can only claim the credit in the year the adoption becomes final.

For example, say you start adopting a child from Ukraine in 2019 and spend $5,000 that year. You cannot claim the adoption tax credit in 2019 because you didn’t finalize the adoption.

In 2020, you spent another $8,000 and finalized the adoption. You can use all $13,000 of expenses to calculate the credit on your 2020 tax return.

You can claim the federal adoption tax credit by completing Form 8839 and attaching it to your federal income tax return, Form 1040.

Employer-Provided Adoption Benefits

Some employers reimburse employees for adoption expenses. The IRS offers a tax break for these benefits as well, as long as the adoption assistance program meets the following criteria:

  • The program benefits all eligible employees, not just highly compensated employees.
  • The program doesn’t pay more than 5% of its benefits to shareholders or owners (or their spouses or dependents).
  • The employer must give reasonable notice of the plan to eligible employees.
  • Employees must provide reasonable substantiation (such as receipts or other documentation) to show that the payments or reimbursements are for qualifying expenses.

If the program meets that criteria, then the payments or reimbursements don’t count as taxable income on the employee’s federal income tax return, and the employer doesn’t have to withhold federal income tax from the payment. However, the employer must still withhold Social Security and Medicare taxes.

Adoptive families can take advantage of both the adoption tax credit and the income exclusion. However, you can’t claim the exclusion and the credit on the same expenses, and the maximum dollar limit ($14,300 for 2020) still applies.

For example, say you have $15,000 of qualified adoption expenses in 2020, and your employer’s adoption assistance program reimburses a maximum of $9,000. You can use the remaining $5,300 of expenses to calculate your adoption tax credit on your 2020 tax return.

That’s the $14,300 maximum dollar limit, minus the $9,000 of expenses already reimbursed by your employer. You won’t get any tax benefits for the remaining $700 of expenses ($15,000 – $14,300).


State Adoption Tax Credits

Many states offer tax credits for families who adopt children from the public child welfare system. Here’s a summary of tax credits available in each state as of the 2020 tax year:

State Tax Credit Amount
Alabama Yes Up to $1,000
Alaska No income tax
Arizona No
Arkansas Yes Up to 20% of the federal adoption tax credit claimed
California Yes Up to $2,500
Colorado No
Connecticut No
Delaware No
District of Columbia No
Florida No income tax
Georgia Yes Up to $2,000
Hawaii No
Idaho No
Illinois No
Indiana Yes The lesser of $1,000 or 10% of your claimed federal adoption tax credit
Iowa Yes Up to $5,000
Kansas Yes 25% of the adoption tax credit claimed on your federal tax return (up to $1,500)
Kentucky No
Louisiana No
Maine No
Maryland No
Massachusetts Yes Income exemption for adoption fees paid to a licensed adoption agency
Michigan No
Minnesota No
Mississippi Yes Up to $2,500
Missouri Yes Up to $10,000
Montana Yes Up to $1,000
Nebraska No
Nevada No income tax
New Hampshire No tax on wages
New Jersey No
New Mexico Yes Up to $1,000
New York No
North Carolina No
North Dakota No
Ohio Yes Up to $1,500
Oklahoma Yes Tax deduction for up to $20,000 of expenses
Oregon No
Pennsylvania No
Rhode Island No
South Carolina Yes Tax deduction for up $2,000 of expenses
South Dakota No income tax
Tennessee No tax on wages
Texas No income tax
Utah Yes Up to $1,000
Vermont No
Virginia No
Washington No income tax
West Virginia Yes Up to $4,000
Wisconsin Yes Up to $5,000
Wyoming No income tax

The rules for claiming adoption tax breaks vary by state and can change from year to year, so talk to your tax advisor to make sure you qualify.


Final Word

Adopting a child can strain family finances, but tax credits can help offset the costs.

And once you’ve finalized the adoption, remember you may be able to take advantage of several more tax breaks for parents. This includes claiming your adopted child as a dependent and claiming the child tax credit and the child and dependent care credit.

Janet Berry-Johnson
Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter.

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