Taxpayers who adopt a child can qualify for the adoption tax credit when they pay out-of-pocket expenses related to the adoption. These expenses include adoption fees, court and attorney fees, and travel expenses. The amount of the tax credit is directly related to how much you spend.
- Adoptive parents may qualify for Adoption Tax Credit for their adoption-related out-of-pocket expenses.
- Adoption tax credit is capped at $14,440 per child for 2021 and $14,890 per child for 2022.
- Adoption tax credit is phased out based on your modified adjusted gross income (MAGI). The phase out MAGI range is $216,600 to $256,660 for 2021.
- Adoption-related expenses may be eligible for credit even prior to the identification of child or completion of the process.
- Adoption tax credit rules and criteria differ for domestic, foreign and special needs adoptions.
How Much Is the Adoption Tax Credit?
The adoption tax credit is indexed for inflation, so it increases a little from year to year. The credit amount is for each eligible child:
- 2022: $14,890
- 2021: $14,440
- 2020: $14,300
You wouldn't be eligible for the full $14,440 tax credit in 2021 or $14,890 in 2022 if you had only $10,000 in qualifying expenses because your credit is limited to the amount of you spend.
You will be entitled to the maximum credit amount, even if your expenses exceed that threshold. So, if the full credit is $14,440 in 2021 but your expenses added up to $20,000, you will not get more credit.
If you adopt a special needs child, you may be entitled to claim the full amount of the credit, even if your out-of-pocket expenses are less than the tax credit amount.
The adoption tax credit is nonrefundable. It can erase any tax liability you owe the IRS, but you won't receive the balance as a refund if the credit is more than what you owe. You would still receive a credit for $10,000 if you owe $10,000 even if you qualify for the full $14,440.
An adoption related expense can be eligible for credit, even before the child has been identified or the adoption process is complete. Any excess or unused can be carried forward for up to five years.
Income Phaseout Ranges
The adoption tax credit is subject to phaseout ranges based on the taxpayer's modified adjusted gross income (MAGI). This is the same as their adjusted gross incomes (AGIs) for many taxpayers. Your MAGI is your AGI with a few add-backs, such as any tax-exempt interest you wouldn't have had to include in your taxable income when you prepared your return.
Any income excluded from tax using the foreign earned income exclusion must be added back as well to determine the phaseout range for the adoption credit. The IRS provides a worksheet for figuring out your modified adjusted gross income in the instructions for Form 8839. These figures are also adjusted periodically to keep pace with the economy:
- 2021: $216,600 to $256,660
- 2020: $214,520 to $254,520
- 2019: $211,160 to $251,160
You can't claim the adoption credit if your MAGI exceeds the upper limit of the range provided by the IRS. Your credit begins reducing at the first threshold, and the more you earn, the less of a portion you can claim. You can only claim a portion of the credit if your MAGI falls between $216,600 and $256,660 in 2021.
Other Eligibility Requirements
You must adopt an eligible child and pay qualified adoption expenses out of your own pocket to claim this credit. Eligible children include those who are age 17 or younger, or a child of any age who is a U.S. citizen or a resident alien and is physically or mentally incapable of caring for themselves.
Qualified adoption expenses are calculated by adding up all the expenses related to the adoption, then subtracting any amounts reimbursed or paid for by your employer, a government agency, or another organization.
Expenses incurred during an unsuccessful adoption might qualify for the credit if a successful adoption follows it, but the two adoption efforts would be considered as one adoption and subject to the dollar limit per eligible child.
Special Needs Children
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.
According to the IRS, for the purpose of adoption tax credits a child is considered to have special needs if:
- They're a U.S. resident or citizen
- The state determines that they can't or shouldn't be returned to their parents' home
- The state determines that the child won't be adopted without the assistance to the adoptive family
The child might or might not have a physical, emotional, or mental handicap as well, but a disability alone won't qualify a child as special needs for purposes of the adoption tax credit. Nor does being in foster care automatically qualify a child as special needs.
When to Claim the Adoption Credit
You can claim the adoption credit in the tax year after your expenses were paid if they were paid before the adoption was final. While expenses that were paid in the year the adoption was final can be claimed in that year itself.
For example, you incurred $2,000 in adoption related expenses in 2019, $3,000 in 2020 and another $4,000 in 2021 when your adoption was finalized. In this scenario, subject to MAGI limitations, the $2,000 you paid in 2019 would be eligible for the tax credit on your 2020 tax return, while the remaining $7,000 ($3,000 +$4,000) can be claimed in 2021.
Different rules apply if the child is a foreign national, however. You can take the adoption credit only in the year the adoption becomes final in this case, or you can take the credit for expenses in the year that you paid them if they were paid in the year after the adoption was finalized.
You must apply for an Adoption Taxpayer Identification Number (ATIN) to begin claiming your adopted child as a dependent if the child doesn't yet have a Social Security number. The IRS provides comprehensive information about the ATIN on its website.
Frequently Asked Questions (FAQs)
How much is Adoption Tax Credit?
For 2021, the maximum dollar amount Adoption Tax Credit is $14,440 per child. For 2022, that amount increases to $14,890.However, you can only claim this credit for qualifying adoption expenses paid out-of-pocket, if you meet certain income thresholds. If your expenses are below this dollar limit, you may carry forward the unused credit for up to five years.
Who qualifies for Adoption Child Credit?
Adoption tax credit is available for qualified expenses paid out-of-pocket in relation to an adoption that meets certain eligibility criteria. The IRS provides a phaseout range based on modified adjusted gross income (MAGI) for this tax credit, which for 2021 is $216,600 to $256,660. 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.