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How the Adoption Tax Credit Can Ease Your Journey to Parenthood

Article Highlights:

  • What is the Adoption Credit

  • Eligibility Criteria

  • Maximum Credit Amount and Phase-Out

  • Interaction with the Alternative Minimum Tax

  • Unused Credit Carryover

  • Employer-Reimbursed Expenses

  • Failed Adoption of a U.S. Child

  • Adoptive Child ID Number

Adoption can be a life-changing journey for many families, offering a unique opportunity to grow a family and provide a loving home to a child in need. However, the process can also be financially demanding, with numerous expenses involved. Recognizing this, the U.S. government offers an adoption credit to help alleviate some of the financial burdens associated with adoption. This article delves into the intricacies of the adoption credit, including eligibility criteria, the maximum credit amount, special considerations for adopting a special needs child, and how the credit interacts with the Alternative Minimum Tax (AMT).

  • What is the Adoption Credit - The adoption credit is a federal non-refundable tax credit to help offset some of the costs associated with the adoption process. This includes necessary adoption fees, court costs, attorney fees, traveling expenses (when relevant), and other expenses directly related to the legal adoption of an eligible child. The credit is designed to encourage adoption by reducing the financial impact on adoptive parents.

  • Eligibility Criteria - To be eligible for the adoption credit, taxpayers must meet specific criteria. Firstly, the adoption must involve an eligible child, defined as any child under 18 years of age or a child who is physically or mentally incapable of self-care. The credit is available for both domestic and foreign adoptions, but the timing and eligibility can vary between the two.

For domestic adoptions, the credit can be claimed for qualified expenses paid before the adoption is final. In contrast, for foreign adoptions, the credit can only be claimed in the year the adoption becomes final.

  • Maximum Credit Amount and Phase-Out - For the tax year 2024, the maximum adoption credit amount is set at $16,810 per child. This amount is subject to inflation adjustments in future years. It's important to note that the credit is non-refundable, meaning it can only reduce your tax liability to zero and any remaining amount of the credit is not paid out as a refund.

The credit and employer reimbursement exclusion (discussed below) begin to phase out in 2024 for taxpayers with modified adjusted gross income (MAGI) above $252,150 and are completely phased out for taxpayers with MAGI above $292,150. These levels are adjusted annually for inflation. While most phaseout thresholds and caps associated with tax benefits vary by filing status, those for the adoption credit and employer-provided adoption benefits are the same for all filing statuses.    

  • Interaction with the Alternative Minimum Tax (AMT) -The AMT was designed to tax high-income taxpayers who used the regular tax system to pay little or no tax. Unlike some other tax credits, the adoption credit can be used to offset both your regular tax liability and AMT. This makes the credit more valuable for taxpayers who are subject to AMT, as it can provide significant tax relief.

  • Unused Credit Carryover - If the adoption credit allowable for the tax year exceeds the taxpayer’s tax liability for that year, the excess credit can be carried to the next tax year and added to the adoption credit allowable for that year, if any. Carryover is not allowed for the part of the credit lost because of the AGI phaseout.

No adoption credit can be carried forward to any tax year following the fifth tax year after the tax year in which the credit arose.

Credit amounts carried forward from a previous tax year are not subject to the income phaseout rules in subsequent tax years. However, a carryforward amount is still subject to the carryforward year’s dollar cap of the credit and the limitation that the credit taken cannot exceed the taxpayer's tax liability for the year.

  • Employer-Reimbursed Expenses – Some employers offer adoption assistance as a fringe benefit. The amount of employer adoption assistance that can be excluded from an employee's gross income for the adoption of a child is the same as the credit limit. The excludable amount phases out in the same manner as the credit. A taxpayer can't claim a credit for any employer-reimbursed adoption expense.

  • Failed Adoption of a U.S. Child - Qualified adoption expenses paid or incurred in an unsuccessful attempt to adopt an eligible U.S. child before successfully finalizing the adoption of another eligible child are eligible for the credit. The unsuccessful/successful adoptions are treated as one effort for each eligible child for purposes of the dollar limit on the credit. Even expenses paid in connection with an unsuccessful attempt to adopt a U.S. child where no later adoption is successful are eligible.

  • Adoptive Child ID Number – The taxpayer must include (if known) the name, age and taxpayer identification number (TIN) of the child on the return. Prospective adoptive parents who have had a child placed in their household by an "authorized placement agency" and meet certain other requirements may apply for a temporary (two-year) adoption taxpayer identification number (ATIN) for the child (unless the child is an alien eligible to get an ITIN) to satisfy filing requirements.

 Adopting a child is a noble and loving act, but it can come with significant financial challenges. The adoption credit serves as a valuable resource for adoptive parents, helping to make adoption a more accessible option for many families.

If you have questions about how this credit or income exclusion might apply to your circumstances, please contact this office.

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