Tax Law Changes Encourage Adoptions
This information is provided as a general guideline on the new
tax benefits available in connection with the adoption of a child.
This discussion is not intended as legal advice nor should such
information be relied on without consulting your tax advisor or
adoption attorney regarding your particular facts and circumstances.
Parents who finalized an adoption last year may claim a maximum credit of $12,650 for adoption expenses on their federal income tax returns. The tax credit phases out for taxpayers with high modified adjusted gross incomes. Sadly, it may expire. Proposals to make that benefit permanent have received much legislative support.
Qualifying expenses include necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the adoption. Adoptive parents who plan to claim the credit should file Form 8839, titled Qualified Adoption Expenses, and attach it to Form 1040. For more information and other downloads to required forms, please visit the IRS website by clicking here.
I. What are the ATC and Exclusion?
The ATC is a tax credit for 100 percent of "qualifying adoption
expenses" (discussed below) up to a maximum amount of $12,650. A tax credit reduces your tax liability dollar for dollar
and thus is much more valuable than a tax deduction which only
reduces the amount of income on which you have to pay tax.
In addition to the ATC, if your employer has implemented an adoption
assistance program, you may be able to exclude from gross income
the employer’s payments or reimbursements for your expenses
in adopting a child. As with the ATC, this amount is limited to
a maximum exclusion of $12,650.
Amounts your employer pays for your adoption expenses are considered
income paid to you by the employer (like salary) on which you otherwise
would have to pay tax. The exclusion allows you to reduce your
income by the amount of the employer payments or reimbursements.
An adoption assistance program is a written plan of the employer
that must meet certain federal tax law requirements. For information
on these requirements, consult IRS Publication 968 or your tax
advisor. You cannot exclude employer payments or reimbursements
for adoption expenses that you incurred before the employer’s
adoption assistance program was in effect.
You may claim both the ATC and the exclusion for
the same adoption, but not for the same expense.
2. Who qualifies for the ATC and the Exclusion?
The ATC and exclusion are available for persons in the process
of adopting a child, persons who have adopted a child or who are
considering adopting a child. There are income limitations that
phase out the ATC and exclusion for higher income earners; however,
the dollar amounts have been significantly increased under the
IRS Form 8839 and the accompanying instructions will tell you how
to figure your modified AGI for the purpose of the credit and exclusion
and will provide the amount by which you would have to reduce your
credit or exclusion if your modified AGI is greater than $150,000.
Note that married couples must file a joint tax return to take
the ATC or exclusion. The income limits in the table below apply
equally to income reported on the joint return of a married couple
as well as income reported on an individual tax return.