Adoption Tax Credits

Adoption is a big decision that involves weighing many factors. One concern potential parents often have is the expense of the process. Fortunately, the federal government provides a way to lighten that financial burden. The IRS offers an adoption tax credit on the income tax of people who adopt children. Of course, as with any tax credit, it is important to understand the particulars of the rule. People who have recently gone through an adoption or who are considering adopting a child should understand what adoptions qualify for the tax credit, and the amount of credit for which they are eligible.

Qualifying for the Adoption Tax Credit

Parents who adopt a child need only to meet two criteria in order to claim their tax credit. They must (1) adopt an eligible child, and (2) they must pay their qualified adoption expenses out of their own pocket. However, it is important to understand the definition of both an “eligible child” and “qualified adoption expenses.”

The legal definition of eligible children contains two separate categories. First, any child age 17 or younger qualifies as an eligible child. Second, a child of any age may qualify if they are a U.S. citizen or resident alien and they are physically or mentally unable to take care of themselves. Children in either of these categories count as eligible for the purposes of the tax credit.

The set of qualified expenses is a bit more complex. The qualified expenses start out as any expenses “directly related” to the adoption. These can include things like court costs, attorneys fees, and even travel expenses, among others. Then, to figure out total qualified expenses the taxpayer must subtract out any costs that they were reimbursed by other parties such as employers or government agencies.

Adoption Tax Credit Amounts

Assuming a person is eligible for the tax credit, it is important to understand the amount for which they are eligible. The adoption tax credit is capped at a certain amount that changes year by year. In 2014, the amount was $13,190. For 2015, the amount increased to $13,400. However, people do not necessarily get to claim the full amount of the credit. Instead, most parents get to claim only their actual qualified expenses up to the cap amount. The exception to this is when parents adopt children with “special needs.” Special needs is a specifically defined term for tax purposes that is different from the usual meaning. A children qualifies for a special needs adoption if:

  • The child was a citizen or resident of the U.S. at the start of the process;
  • The state determined that the child cannot/should not go back to their parents home; and
  • The state determined that the adoptive family will likely need some form of assistance.

If an adoption meets these qualifications, then parents may claim the full tax credit regardless of their actual expenses.

Adoptions are a big step, with many procedural elements. If you are considering adoption and have questions about the process, contact a Naperville family law attorney today.

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