Tax Law Changes Encourage Adoptions

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.

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.

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 new law.

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.