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What to know about the Adoption Tax Credit

Posted on February 12, 2018

If you are a new adoptive parent – or tried to adopt this past year — you may qualify for a tax credit this tax season.

First, congratulations!  Second, here is what the CPAs at Teipen Selanders Poynter & Ayres want you to know about this special tax credit:

  • Your adopted eligible child is an individual under age 18. It can also be an individual of any age who is physically or mentally unable to care for themselves.
  • Special rules apply to taxpayers who adopted an eligible U.S. child with special needs. Taxpayers may be able to take the exclusion even if they didn’t pay any qualified adoption expenses. Check with your CPA to be sure.
  • Qualified adoption expenses must be directly related to the adoption of the child. Expenses that may qualify include adoption fees, court costs, attorney fees, and travel. Expenses must also be reasonable and necessary.
  • The Adoption Tax Credit is nonrefundable. This means that this credit may only reduce a taxpayer’s tax liability to zero, so if your credit is more than the tax you owe, you cannot legally receive an additional amount as a refund.
  • However, taxpayers may carry any unused credit forward to the next year. So taxpayers who have an unused credit in tax year 2017 can use it to reduce their taxes for 2018. Taxpayers can carry any remaining credits for up to five years, or until they fully use the credit.
  • Depending on the adoption’s cost, taxpayers may be able to claim both the tax credit and the exclusion. However, they can’t claim both a credit and exclusion for the same expenses.
  • If the taxpayer’s employer helped pay for the adoption through a qualified adoption assistance program, the taxpayer may qualify to exclude that amount from tax. Check with your CPA to be sure.
  • Income limits. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount a taxpayer can claim depending on the amount of their income.
  • Generally, taxpayers may claim this credit whether the adoption is domestic or foreign. However, the rules for which year a taxpayer can claim qualified expenses differ between these two types of adoption.

As is the case for most tax credits, there are some circumstances that don’t quite fit the rules outlined above. It takes an experienced CPA to understand your adoptive story and put it into proper perspective, from a tax point of view.

If you need help figuring out the Adoptive Tax Credit, give us a call. We will make sure you take legal advantage of every aspect of this special credit related to your unique situation.