Adoption Tax Credit 2023

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If you are in the process of adopting a child or even considering it, you should know that there is a federal tax credit that can save you money on your taxes. Some of the adoption expenses that qualify for the credit include court and attorney fees, traveling expenses, adoption agency fees and any other expenses directly related to legally adopting an eligible child. Watch this tax tip video from TurboTax to learn more about qualifying for the federal adoption tax credit.

Adopting

The IRS provides a phaseout range based on modified adjusted gross income (MAGI) for this tax credit, which is $223,410 to $263,410 for tax year 2022. The credit may be applied to expenses incurred during domestic, foreign and special needs adoptions. It is applicable for successful and in some cases unsuccessful adoptions as well. Families who have adopted a child with special needs from foster care may be eligible to claim a federal adoption tax credit for qualified adoption expenses.

In addition to this exclusion, you also are permitted to claim the adoption tax credit for the remaining amount of adoption expenses. The thing to remember is that you are not allowed to claim the tax credit and the exclusion for the same expenses. Again, you should consult with a tax professional to determine the extent of the adoption tax credit and exclusion available to you. People who do not have federal income tax liability will not benefit this year. We encourage them to claim the credit and carry it forward to future years since the credit may become refundable again in the future. The Child Tax Credit changed in 2018, there was also a temporary change in 2021.

New Addition: Adoption Tax Credits

In its current form, Congress rejected the lobbyists’ plea to make the credit refundable. This would have meant that an adoptive parent would receive a check for the full credit whether or not they owed that amount in taxes for that year. Instead, Congress chose to treat the credit as a true “credit” meaning that the credit can only offset actual tax liability for that given year. If the adoption tax credit exceeds the amount of your tax liability for the year, the good news is that the excess amount of the tax credit can be carried forward for up to five years. Parents who adopt a child with special needs and are not basing their request on expenses should claim the credit the year of finalization. Parents who adopt internationally cannot claim the credit until the year of finalization.

• Because of the nonrefundable nature of the credit, if you can’t use the entire credit’s value in the first year you claim it, you can carry forward any remaining amount for up to five years.
• The IRS may request the final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination that the child is a special needs child.
• If a child welfare agency deems a child hard to place, then the adoption tax credit for that child will remain flat.

If you are married and filing separately, you must meet special requirements to take the tax credit. Example — A couple adopted two children from China and had $40,000 in legal, travel, and agency fees. If their modified adjusted gross income was between $216,660 and $256,660, they would receive only a portion of the credit, since the credit begins to phase out at incomes of $216,660. If their modified adjusted gross income was between $223,410 and $263,410, they would receive only a portion of the credit, since the credit begins to phase out at incomes of $223,410.

Adoption Tax Credit Refundability Act

For the 2021 Adoption Tax Credit, the maximum amount available will be available for those with a MAGI below $216,660. The credit will begin to phase out for families with a MAGI above that amount and will be unavailable to families with incomes of $256,660 or above. The adoption credit is available to most adoptive parents, with some exceptions.

• In most cases, if you are married, you must file a joint return to take the tax credit.
• To get more information on the 2023 adoption tax credit, you can fill out our online contact form.
• The 2022 adoption tax credit is NOT refundable, which means taxpayers can only use the credit if they have federal income tax liability (see below).
• How much, if any, of the adoption tax credit a parent will receive depends on their federal income tax liability in 2022 (and the next five years).
• People who do not have federal income tax liability will not benefit this year.

You are be entitled to no more than the maximum credit amount, even if your expenses exceed that threshold. So, if the full credit is $15,950 in 2022 but your expenses added up to $20,000, you will not get more credit. While adoption home studies vary slightly from agency to agency and state to state, there are several key elements that are almost always included in every home study. But, the child must already be placed with the family for them to eligible for dependency.

Qualifications for the Adoption Tax Credit

The parents had $6,500 in federal income tax withheld from their paychecks, and their tax liability is $7,000, which means they would normally owe $500 to the IRS. Their adoption tax credit is $29,780, and they only have the two children who were both under age 17 at the end of 2022. They first use $1,000 in child tax credit, then $6,000 in adoption tax credit on their 2022 taxes. They get a refund of the $9,500—the $6,500 they already paid plus $3,000 in refundable additional child tax credit, and can carry over $23,780 for up to five more years.

Parents can receive up to $14,440 in reimbursement from their employer for adoption expenses without paying taxes on that benefit. But, you can’t double-dip, meaning you cannot take a tax credit for adoption expenses already reimbursed by your company. It helps many families, but could help many more families if it were refundable. What If My Qualified Adoption Expenses Are Greater Than My Tax Liability?

Special needs children are those who receive adoption assistance or adoption subsidy benefits, typically because they’re in foster care. Benefits can include Medicaid or reimbursement of certain expenses, and they’re received because the state believes that the child wouldn’t be adoptable if they weren’t provided. In some cases, a child can be under your care when tax season comes around but before finalization is complete. In these cases, parents sometimes wonder if they are able to claim the adoption tax credit.

The expenses can be incurred in both a domestic and international adoption. The adoption of a child with special needs may entitle you to claim the full amount of the adoption tax credit even if you have not incurred the full amount of expenses. Bottom line, if your child does not receive adoption subsidy/adoption assistance benefits, you will need to have qualified expenses to claim the credit.

Claiming the Federal Adoption Tax Credit for 2021

Please note that we are adoption professionals and can discuss our program, but any specific information about the tax credit (like whether or not you qualify) should be directed to a tax attorney or accountant. It is important to know https://turbo-tax.org/ that if your employer reimburses you for certain adoption expenses, you are permitted to exclude the amount of the reimbursement from your income. You should inquire into whether your employer offers an adoption benefit program.

Because of the nonrefundable nature of the credit, if you can’t use the entire credit’s value in the first year you claim it, you can carry forward any remaining amount for up to five years. For example, if you claim the full credit in 2022 but only have $10,000 of tax liability, the $4,440 credit balance rolls into the following https://turbo-tax.org/what-is-the-adoption-tax-credit/ year for adopting an eligible child. The IRS defines an eligible child as any person under the age of 18 or any person who — regardless of age — qualifies as disabled and physically or mentally unable to take care of themselves. You can ask a tax professional to get the most up-to-date information on tax credits for your state.