The process of adopting a child can be both incredibly exciting and financially stressful. While the financial side of things may not be your primary concern, the truth is that adopting a child can be an expensive proposition. Fortunately, the tax code is designed to promote certain behaviors that are deemed to be socially beneficial, and adopting a child falls into this category. In other words, you might find some relief in the form of tax credits if you go through the rewarding but financially challenging process of adopting a child. Here are some of the main things adoptive parents should know about how their taxes will be impacted.
What Is the Adoption Tax Credit?
The adoption tax credit provides direct governmental relief to help offset some of the expenses incurred when adopting a child. For tax year 2021, the maximum available adoption tax credit is $14,400 per child. This amount applies to qualifying expenses for adoptions that were completed in 2021.
Unlike some tax credits, the adoption tax credit is nonrefundable. This means that it can only be used to offset taxes that you already owe. For example, if you have $14,400 in qualifying adoption expenses in 2021 but your tax liability is only $10,000, you can only claim $10,000 of the credit. The additional $4,400 will not be paid to you in the form of a tax refund, as may be the case with other credits like the earned income tax credit.
What Expenses Qualify for the Adoption Tax Credit?
The definition of a qualifying expense for the adoption tax credit is fairly broad. Essentially, any expense that was necessary for the adoption will qualify. Sample qualifying expenses include:
- Medical examinations
- Travel expenses incurred during the process, including airline tickets and gas
- Meals and lodging
- Lawyer fees
- Dossier fees
- Agency fees
- Court fees
The list is nearly endless when it comes to potentially qualifying expenses; the only requirement is that they are directly related to the adoption process. One important exception to note is that the living expenses of an expectant mom giving up their child for adoption do not qualify.
Even at a generous $14,400, the adoption tax credit usually isn’t enough to cover all of the costs of adopting a child. Thus, when considering which expenses to offset with the credit, only use those that you’re absolutely sure will qualify. For example, travel, agency and lawyer fees alone may exceed the $14,400 threshold, so those should be the ones you offset with the credit. More questionable expenses, such as books or toys for your new child, should be excluded.
Adopting Special Needs Children
One important exception to the rules of the adoption tax credit applies to the adoption of a special needs child. In this case, adoptive parents are entitled to the full $14,400 credit per child, regardless of the actual expenses incurred. However, the adoption must meet the criteria of a special needs adoption, which is independently determined by each state. Generally speaking, the child must have been receiving adoption assistance support while in U.S. foster care to qualify. International adoptions do not qualify under any circumstance.
What Is the Child Tax Credit?
After the adoption process is over, your adopted child is considered a dependent, just as with any other child. This means that you will also qualify for the child tax credit. The child tax credit is designed to help families offset the cost of raising children, and it was enhanced in tax year 2021.
The maximum amount of the child tax credit for tax year 2021 is $3,600 for children under age 6 and $3,000 for each qualifying child between 6 and 17. Unlike the adoption tax credit, the child tax credit is fully refundable. This means that if you adopted two children, one age 10 and one age 5, you can qualify for $6,600 in credits, even if you don’t have any outstanding tax liability. Recent adjustments to the credit removed the minimum income requirement, meaning you can claim the credit even if you have no income at all. However, there is an income phase-out on the high end, starting at $75,000 for single filers, $150,000 for joint filers and $112,500 for those filing as head of household.
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