Adopting a child can be very expensive, but there are two tax benefits that are available to offset the expenses of adopting.
In 2022, adoptive parents may be able to claim a credit against their federal tax for up to $14,890 of “qualified adoption expenses” for each child. This will increase to $15,950 in 2023. That’s a dollar-for-dollar reduction of tax.
Also, adoptive parents may be able to exclude from gross income up to $14,890 in 2022 ($15,950 in 2023) of qualified expenses paid by an employer under an adoption assistance program. However, both the credit and the exclusion are phased out if the parents’ income exceeds certain limits.
The great news is that parents can claim both a credit and an exclusion for the expenses of adopting a child. As long as they don’t claim the credit and an exclusion for the same expenses. All types of adoptions are eligible including international, domestic private, and public foster care. And remember, this credit and exclusion is allowed for each child that is adopted.
To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These qualified costs include any and all reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including meals and lodging), and other expenses directly related to the legal adoption of an “eligible child.”
Qualified expenses don’t include those connected with the adoption of a child of a spouse (stepparent adoptions), a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a government program. Expenses reimbursed by an employer don’t qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.
Expenses related to an unsuccessful attempt to adopt a child may qualify. Expenses connected with a foreign adoption (the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted. An expense could qualify as an adoption expense even if the expense is paid before an eligible child is identified.
Taxpayers who adopt a child with special needs are deemed to have qualified adoption expenses in the tax year in which the adoption becomes final, in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,890 for 2022 ($15,950 for 2023). Even if the actual amount of qualified expenses are lower, they can take the adoption credit or exclude employer adoption assistance up to that amount.
There can also be timing rules of which you want to be aware. The tax year in which the credit can be claimed depends on when the expenses are paid, whether it’s domestic or international and when, if ever, the adoption is finalized. For domestic adoption, the qualified costs are allowable for the tax year following the year of payment, if paid before the year the adoption becomes final. This is allowed even if the eligible child was never identified or if the adoption is never finalized. International adoptions follow the same rules for allowing costs before and during the year but can only be taken in the year the adoption is finalized.
An eligible child is under age 18 at the time a qualified expense is paid. A child can still be eligible who turns 18 during the year, for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him- or herself is eligible, regardless of age.
A special needs child refers to one who the state has determined can’t or shouldn’t be returned to his or her parents and who can’t be reasonably placed with adoptive parents without assistance because of a specific factor or condition. Only a child who is a citizen or resident of the U.S. is included in this category.
The credit allowed for 2022 is phased out for taxpayers with adjusted gross income (AGI) over $223,410 ($239,230 for 2023) and is eliminated when AGI reaches $263,410 ($279,230 for 2023).
Something to take note of is that the adoption credit isn’t “refundable.” If the sum of your refundable credits (including any adoption credit) for the year exceeds your tax liability, the excess amount isn’t refunded to you. This means the credit can be claimed only up to your tax liability. You will only receive a refund of federal income taxes up to the amount of taxes that would have been paid in the year that you are claiming the credit.
Get the full benefit
Contact your Wegner tax advisor with any questions. We can help ensure you get the full benefit of the tax savings available to adoptive parents.