By Kimberly Surratt, Esq.
If you are thinking about pursuing an adoption, make sure you start to start and document all of your expenses related to the process. In the United States tax code provides an adoption credit for qualified adoption related expenses for each child adoption. The IRS just released the 2020 adjusted through their Revenue Procedure 2019-44 report. The maximum tax credit allowed in 2020 is set at $14,300 per child (in 2019 is was $14,080 and $13,810 in 2018). In addition to a credit, the IRS does allow an exclusion from income for employer provided adoption assistance.
The tax credit is available for must adoptive parents. However, the credit is not available if the taxpayer’s income exceeds certain values set by the code. The tax credit begins to phase out for families with modified adjusted gross income in excess of $214,520 and is completely phased out for taxpayers with modified adjusted gross income of $254,520 or more. The credit is nonrefundable but can be carried forward for up to five years.
The code states that the credit is allowed for “an adoption of a child with special needs”; however, the adoption can be either through private domestic private adoption, international adoption or through the foster care system so long as the child is under the age of 18, or is physically or mentally incapable of self-care. In contrast, the adoption of your stepchild does not qualify as “special needs”. The IRS has specifically declared that an adoption by a registered domestic partner who lives in a state that allows same-sex second parent or co-parent to adopt his or her partner’s child does qualify for the credit, as long as those expenses otherwise qualify for the credit.
The expenses that can be used for the credit and the exclusion (the “qualified adoption expenses”) are:
- 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.
In summary, keep all your receipts and track you any money spent in the process. The IRS doesn’t require you to have a child identified before the expenses can be used. Thus, if you start the process and you have had a home study, but you have not been matched with a child you will still be able to use the cost of the home study for your tax credit. There are extensive rules about what year you can take the credit and they vary based on a domestic adoption versus a foreign adoption. For more information, the IRS has a published report, Topic No. 607 that lists all of the intricacies to the credit.