If you’ve adopted a child recently or plan to adopt a child soon, congratulations! We help families adopt as part of our family law practice. Expanding your family through adoption is joyful, and we’re thrilled to be a part of it.
Adoptive parents may have some tax advantages that could help now that it is time to start preparing 2016 taxes. One big advantage is the federal adoption tax credit, which allows many adoptive parents to receive a credit to recover some of the costs of adoption. One note, though: the tax credits are not extended to step-parents adopting the child of their spouse. The tax credits are only available if you are adopting a child under the age of 18 or a child who is physically or mentally unable to care for himself or herself.
First, these are tax credits, not deductions. Tax credits are applied to what you owe in each year. The Federal Adoption Tax Credit is limited to your tax liability for the year but can be carried forward for up to five years. So, if you don’t use all your adoption tax credit in one year, you can use the remainder over the next five years.
The maximum dollar limit for 2016 was $13,460 per child in tax credits. This rate is subject to income restrictions, however. If your modified adjusted gross income for 2016 was below $201,920, you can take the entire credit. If your income was above that, you’ll be subject to phase-out or limitation of the tax credit which can get complicated. You can read more about the details here on the IRS web site.
Which expenses can I deduct?
The IRS rules provide that qualified adoption expenses for purposes of the tax credit include reasonable and necessary adoption fees. Attorneys’ fees and court costs also are considered qualified adoption expenses, as are travel expenses to and from your adoption location, and lodging while you are visiting and meals away from home. In addition, qualified adoption expenses can also include other expenses that are “directly related to and for the principal purpose of” the adoption. Since such other expenses aren’t specifically defined, be sure to keep good records of any expenses you plan to submit as part of the tax credit.
Which years can I make the claim?
This varies depending on if the adoption was domestic or foreign, when the expenses were paid, and when (if ever) the adoption was finalized. Typically, for parents adopting a child in the U.S., expenses paid before the year that the adoption is final are allowable as a credit for the tax year following the year of payment. Interestingly, this is true if the adoption is never finalized and even when an eligible child to adopt is never identified.
For parents adopting from foreign locations, all expenses paid before and during the year of adoption are allowable as a tax credit during the year the adoption is finalized.
Adoption help is available