What is the adoption tax credit?

Many couples choose to bring children into their families through adoption.

A legal adoption does not include the adoption of a minor child by the child’s stepparent. In these cases, there is no adoption tax credit from either the state or the federal government.

Adopting a child is a very costly and emotionally taxing process. The IRS and the State of Ohio both take a little bit of the financial strain of the adoption process away through significant adoption tax credits. This adoption tax credit begins to phase out for taxpayers with modified adjusted gross income more than $203,540 and is completely phased out for taxpayers with a modified adjusted gross income of $243,540.

The amount of the IRS adoption credit varies based on whether the child is a special needs child or not. For 2017 the maximum adoption tax credit for both domestic and international non special needs adoptions is $13,750 for qualified adoption expenses.

The IRS has clear rules on what are qualified adoption expenses. Qualified adoption expenses according to the IRS include reasonable and necessary adoption fees, court costs and attorney fees, traveling expenses, and other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child. An expense may be a qualified adoption expense even if the expense has been paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption may treat those home study fees as a qualified adoption expense.

For a special needs child the credit of $13,750 is available regardless of whether the taxpayer actually incurred the full $13,750 of expenses. A child with special needs is defined as a U.S. citizen or resident determined by a state to be unlikely to be adopted unless adoption assistance is provided due to the child’s age, ethnic background, medical condition, membership in a minority group or sibling group or some other specific reason. The state makes the determination if the child is considered a special needs child and you will know this prior to completing the adoption. Children adopted internationally do not qualify for special needs even if they have been diagnosed with special needs.

The adoption tax credit for taxes for 2017 taxes is a non-refundable credit.

A non-refundable credit can only reduce your tax liability to zero. A refundable credit will generate a refund if it reduces the tax liability below zero.

In addition to and separate from the federal income tax credit, the state of Ohio allows residents a $10,000 income tax credit for a family that legally adopts a child. The law says that the child must be under 18 years of age to receive either credit. In other words, the adoptive family can potentially receive the adoption tax credit from both the state and federal government once the child is legally adopted. An adoption becomes legal when the final decree of order of adoption is issued by the appropriate court under the laws of the state in which the child is adopted.

If expenses were incurred for a failed adoption these expenses may qualify if the expenses were related to efforts to adopt a U.S. citizen or resident child.

The credit cannot be claimed for the adoption of a foreign child unless the adoption becomes final.

When to claim the expenses related to a failed adoption can be a bit tricky. The IRS instructions indicate that you take the expenses related to the failed adoption in the year after the expenses were incurred.

The IRS instructions also indicate that if you take a credit for a failed adoption and later successfully adopt a child, you must offset the current credit by the previously taken credit.

However, nothing in the statute or legislation supports this IRS position. Each adoption or failed adoption involves a different child, so you are permitted to take a separate credit against each child.