Taxpayers who incur adoption expenses may be eligible to receive a tax credit of up to $14,080 per eligible child (for 2019). The tax credit is non-refundable, which means it is limited to your tax liability for that year. However, the credit amount in excess of your tax liability may be carried forward for up to five years.
In addition to the tax credit, the internal revenue code allows for taxpayers to exclude from their income certain employer-provided adoption assistance.
An eligible child is an individual who is under the age of 18 or is physically or mentally incapable of self-care.
Qualified Adoption Expenses
For both the tax credit and the exclusion, qualified adoption expenses include:
Reasonable and necessary adoption fees,
Court costs and attorney fees,
Traveling expenses (including amounts spent for meals and lodging while away from home), and
Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
An expense may be a qualified adoption expense even if the expense is paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption effort may treat the fees as qualified adoption expenses.
Note, though, qualified adoption expenses do not include expenses that a taxpayer pays to adopt the child of the taxpayer's spouse.
Income and Dollar Limitations
The tax credit and the exclusion are each subject to an income limitation and a dollar limitation. The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (MAGI). If your MAGI amount for 2019 falls between certain amounts, your credit or exclusion is subject to a phaseout (i.e., is reduced or eliminated). For tax year 2019, the MAGI phaseout begins at $211,160 and ends at $251,160. Thus, if your MAGI amount is below $211,160 for 2019, then you are entitled to the full amount of the credit or exclusion. But if your MAGI amount for 2019 is $251,160 or more, you cannot claim the credit or exclusion.
You must reduce the tax credit's dollar limit for a particular year by the amount of qualified adoption expenses paid and claimed in previous years for the same adoption effort. For example, if you claimed a $3,000 credit in connection with a domestic adoption in 2018 and paid an additional $14,080 of qualified adoption expenses in 2019 (when the adoption became final), the maximum credit you can claim in 2019 is $11,080 ($14,080 dollar limit less $3,000 of qualified adoption expenses claimed in 2018).
Timing rules: What tax year can you claim the credit?
The tax year for which you can claim the credit depends on the following:
When the expenses are paid;
Whether it is a domestic adoption or a foreign adoption; and
When, if ever, the adoption was finalized.
Generally, the credit is allowable whether the adoption is domestic or foreign. However, the timing rules for claiming the credit for qualified adoption expenses differ depending on the type of adoption.
A domestic adoption is the adoption of a U.S. child (an eligible child who is a citizen or resident of the U.S. before the adoption effort begins). Qualified adoption expenses paid before the year the adoption becomes final are allowable as a tax credit for the tax year following the year of payment (even if the adoption is never finalized and even if an eligible child was never identified).
A foreign adoption is the adoption of an eligible child who is not yet a citizen or resident of the U.S. before the adoption effort begins. In contrast to the rules for domestic adoptions, qualified adoption expenses paid before and during the year for a foreign adoption are allowable as a tax credit for the year the adoption becomes final.
Once an adoption becomes final, and subject to the dollar limitation discussed above, qualified adoption expenses paid during or after the year of finality are allowable as a tax credit for the year of payment, regardless of whether the adoption is foreign or domestic.
Claiming the Tax Credit on IRS Form 8839
To claim the adoption credit or exclusion, complete IRS Form 8839 (Qualified Adoption Expenses) and attach it to your federal tax return. The Instructions for Form 8839 contain additional information about the adoption credit and exclusion.
For more information, see the following resources: