Adoptive Tax Credit

In order to assist families to adopt children who are in need of permanent, stable homes, the Internal Revenue Code of the United States provides for a credit against tax regarding the expenses of adoption. This credit varies from year to year, and regulations differ regarding the use of the credit based on type of adoption and tax bracket of the adopting taxpayer. Expenses which are eligible for the credit are those necessary for a lawful, valid adoption, and include (but are not limited) to fees of a licensed child placing agency, amounts permitted to be paid by the laws of the State or Country in which the adoption occurs, legal fees, court costs, investigation and home study costs, transportation and housing for implementation of the adoption, and other such related expenses.

This is a credit against tax owed rather than a deduction from income. For many people who have employer withholding or who have paid estimated tax deposits, this will mean a cash return of the credit when they file their return with the IRS.

The tax credit applies to domestic as well as international adoptions. For domestic cases, the credit can be taken even if the adoption cannot be finalized for some reason. In international placements, the credit only applies when the adoption is legally finalized. The credit is calculated per child, not per year. Thus, if siblings are adopted, even though the proceeding is the same, the credit will potentially be increased by the number of children involved.

The credit applies to most adoptions, domestic or international, EXCEPT for step-parent adoptions.

The credit for 2008 tax year was $11,650, and if there was a benefit provided by an employer the amount which can be excluded also increased to $11,650. Either the credit or exclusion can be claimed, or a combination of the two, not to exceed the $11,650 total. The tax credit phases out for taxpayers with high incomes, set for 2008 at $174,730 to $214,730. There is no credit or exclusion available if the adjusted gross income is higher than $214,730.

The Credit for 2009 increased to $12,150 with the number for exclusion for employer provided assistance also increased to that level. Either the credit or exclusion can be claimed, or a combination of the two, not to exceed the $12,150 total. The phase out level for high income tax payers is between $182,180 and $222,180. There is no credit or exclusion if the income is higher than $222,180.

There is a special rule for the adoption of qualified special needs children. For adoptions of non-special needs children the credit or exclusion can only be taken to the extent that expenses have been incurred and paid. For special needs children the entire credit can be taken even if the expenses did not reach that high.

Special forms are provided by the Internal Revenue Service for filing with a tax return due in the spring after the year of finalization for the domestic or international adoption, or after failure to complete with respect to a domestic adoption.

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