Economy & Policy

Adoption Tax Credits (Federal & State) – Requirements & Eligibility

The determination to undertake a toddler is a giant one for any potential mother or father, and one of many considerations usually has to do with prices. Adoption-related bills can range extensively relying on whether or not you’re employed with an company, undertake from foster care, work immediately with the delivery mother and father, or undertake internationally.

Fortunately, there are federal and state help packages that reduce monetary obstacles to adoption.

Federal Adoption Tax Credit and Adoption Assistance Programs

The U.S. Tax Code gives two separate help packages for potential adoptive mother and father. Both packages assist cover qualified adoption expenses, which the IRS defines as:

  • Reasonable and crucial adoption charges
  • Court prices and lawyer charges
  • Traveling bills (together with meals and lodging whereas away from dwelling)
  • Other bills immediately associated to the authorized adoption of a kid

To qualify, you need to pay the expense to undertake a toddler beneath the age of 18 or somebody of any age who’s bodily or mentally incapable of self-care. Qualified bills don’t embody bills paid to undertake a stepchild.

Adoption Tax Credit

The federal adoption tax credit score is price as much as $14,300 per youngster for the 2020 tax year.

Parents who undertake a “special needs” youngster routinely qualify for the utmost credit score, no matter their precise adoption bills. The IRS’s definition of a particular wants adoption may differ from definitions used elsewhere.

The adoption should meet all three of the next standards to qualify as a particular wants adoption:

  1. The youngster was a citizen or resident of the U.S. or its possessions when the adoption effort started.
  2. The state decided that the kid can’t or shouldn’t return to their mother or father’s dwelling.
  3. The state decided that the kid in all probability wouldn’t be adoptable until it assists the adoptive household financially.

Based on these standards, overseas adoptions aren’t thought-about particular wants. Also, U.S. kids with disabilities may not be considered particular wants if the state doesn’t take into account them troublesome to put for adoption.

Income Limitations

However, the quantity of the federal adoption tax credit score phases out for high-income taxpayers. It begins to section out as soon as your modified adjusted gross income (MAGI) reaches $214,520 and phases out fully at $254,520.

The credit score phases out proportionally in case your revenue is between $214,520 and $254,520.

So in case your revenue is $234,520 — the midpoint of the phase-out vary — the quantity of your credit score is reduce in half. If your revenue is $224,520 — one-quarter of the phase-out vary — the quantity of your credit score is lowered by 25%.

The revenue limits apply whether or not you’re single or married and file a joint tax return along with your partner. The adoption tax credit score isn’t out there in case your submitting standing is married submitting individually.


The adoption tax credit score is nonrefundable. In different phrases, if it reduces your tax liability for the year beneath zero, you received’t obtain the surplus as a tax refund.

However, you’ll be able to carry any unused credit score ahead for as much as 5 years, utilizing it to offset your tax liability sooner or later.

When You Can Claim the Credit

The guidelines for claiming the credit score rely on whether or not the adoption is home or overseas.

Domestic Adoptions

If you undertake a U.S. youngster, you’ll be able to declare adoption bills for the tax year following the year of fee, even for those who by no means finalize the adoption. However, any prices you used to say the credit score on an unsuccessful adoption will scale back the quantity you’ll be able to declare for a subsequent adoption.

For instance, say you began the adoption course of in 2018, however the adoption fell by means of. You used $3,000 of bills to say the adoption tax credit score in your 2019 return.

In 2020, you made one other try and undertake, spending $10,000, and efficiently finalized the adoption that year. When you declare the adoption credit score in your 2020 tax return, you’ll be able to solely declare $7,000 of bills ($10,000 – $3,000).

Foreign Adoptions

If you undertake a toddler who isn’t but a citizen or resident of the U.S. or its possessions, you’ll be able to solely declare the credit score within the year the adoption turns into last.

For instance, say you begin adopting a toddler from Ukraine in 2019 and spend $5,000 that year. You can’t declare the adoption tax credit score in 2019 since you didn’t finalize the adoption.

In 2020, you spent one other $8,000 and finalized the adoption. You can use all $13,000 of bills to calculate the credit score in your 2020 tax return.

You can declare the federal adoption tax credit score by finishing Form 8839 and attaching it to your federal revenue tax return, Form 1040.

Employer-Provided Adoption Benefits

Some employers reimburse workers for adoption bills. The IRS provides a tax break for these advantages as nicely, so long as the adoption help program meets the next standards:

  • The program advantages all eligible workers, not simply highly compensated workers.
  • The program doesn’t pay greater than 5% of its advantages to shareholders or homeowners (or their spouses or dependents).
  • The employer should give affordable discover of the plan to eligible workers.
  • Employees should present affordable substantiation (equivalent to receipts or different documentation) to point out that the funds or reimbursements are for qualifying bills.

If this system meets that standards, then the funds or reimbursements don’t rely as taxable revenue on the worker’s federal revenue tax return, and the employer doesn’t must withhold federal revenue tax from the fee. However, the employer should nonetheless withhold Social Security and Medicare taxes.

Adoptive households can benefit from each the adoption tax credit score and the revenue exclusion. However, you’ll be able to’t declare the exclusion and the credit score on the identical bills, and the utmost greenback restrict ($14,300 for 2020) nonetheless applies.

For instance, say you may have $15,000 of certified adoption bills in 2020, and your employer’s adoption help program reimburses a most of $9,000. You can use the remaining $5,300 of bills to calculate your adoption tax credit score in your 2020 tax return.

That’s the $14,300 most greenback restrict, minus the $9,000 of bills already reimbursed by your employer. You received’t get any tax advantages for the remaining $700 of bills ($15,000 – $14,300).

State Adoption Tax Credits

Many states provide tax credit for households who undertake kids from the general public youngster welfare system. Here’s a abstract of tax credit out there in every state as of the 2020 tax year:

State Tax Credit Amount
Alabama Yes Up to $1,000
Alaska No revenue tax
Arizona No
Arkansas Yes Up to twenty% of the federal adoption tax credit score claimed
California Yes Up to $2,500
Colorado No
Connecticut No
Delaware No
District of Columbia No
Florida No revenue tax
Georgia Yes Up to $2,000
Hawaii No
Idaho No
Illinois No
Indiana Yes The lesser of $1,000 or 10% of your claimed federal adoption tax credit score
Iowa Yes Up to $5,000
Kansas Yes 25% of the adoption tax credit score claimed in your federal tax return (as much as $1,500)
Kentucky No
Louisiana No
Maine No
Maryland No
Massachusetts Yes Income exemption for adoption charges paid to a licensed adoption company
Michigan No
Minnesota No
Mississippi Yes Up to $2,500
Missouri Yes Up to $10,000
Montana Yes Up to $1,000
Nebraska No
Nevada No revenue tax
New Hampshire No tax on wages
New Jersey No
New Mexico Yes Up to $1,000
New York No
North Carolina No
North Dakota No
Ohio Yes Up to $1,500
Oklahoma Yes Tax deduction for as much as $20,000 of bills
Oregon No
Pennsylvania No
Rhode Island No
South Carolina Yes Tax deduction for up $2,000 of bills
South Dakota No revenue tax
Tennessee No tax on wages
Texas No revenue tax
Utah Yes Up to $1,000
Vermont No
Virginia No
Washington No revenue tax
West Virginia Yes Up to $4,000
Wisconsin Yes Up to $5,000
Wyoming No revenue tax

The guidelines for claiming adoption tax breaks range by state and may change from year to year, so speak to your tax advisor to ensure you qualify.

Final Word

Adopting a toddler can pressure household funds, however tax credit can assist offset the prices.

And when you’ve finalized the adoption, bear in mind you could possibly benefit from a number of extra tax breaks for folks. This consists of claiming your adopted youngster as a dependent and claiming the youngster tax credit score and the youngster and dependent care credit score.

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