Along with all the other tax breaks for parents, the Adoption Credit can help ease the financial stress of adding a new child to your family.
The Adoption Credit is a nonrefundable tax credit. That means it can’t give you a refund by itself, but it does take a good chunk off the top of your tax liability. So much, in fact, that you probably won’t even be able to use up all the credit in one year. Good news: You can roll over what you don’t use for up to five years.
Now, let’s take a look at how this credit helps adopting parents.
The Adoption Credit has a maximum value of $14,300 (for tax year 2020). Why a maximum? If your adoptions costs are less than the maximum, what you actually paid is your maximum credit (unless it’s a special needs adoption – see below). And the total is not just for one year’s expenses, but your total for the adoption, which can span years.
The credit offsets qualified adoption expenses, such as court costs, attorney fees, traveling expenses (meals and lodging), and other directly related expenses.
A qualifying adoptee must be one of the following:
If you’re adopting a U.S. citizen or resident, you must wait one year before claiming the credit for qualifying expenses. Starting the adoption process this year means you claim any qualified expenses on next year’s return.
If you are adopting a child who is not a U.S. citizen or resident, you can claim the credit for the tax year in which the adoption was finalized.
The total value of the credit begins dropping when your modified adjusted gross income (MAGI) is $214,520, and phases out completely when your MAGI exceeds $254,520.
If you’re adopting a special needs child, you may be entitled to the full credit even if you had little or no out-of-pocket costs.
For a special-needs child, certain eligibility requirements must be met:
Use Form 8839 Qualified Adoption Expenses to claim the Adoption Credit