How does adoption affect my tax return?

by | May 22, 2025 | Individual Taxes, Life Events

Here’s what HIVE AI had to say about “How does adoption affect my tax return?”:

Adopting a child can have significant impacts on your tax situation, providing several tax benefits while also changing certain filing requirements. Here’s a comprehensive explanation of how adoption affects your tax return:

Adoption Tax Credit

One of the most significant tax benefits for adoptive parents is the Adoption Tax Credit:

Taxpayers who adopted or started the adoption process during the year may qualify for the adoption credit. This credit can be applied to international, domestic, private, and public foster care adoptions. IRS – Publication 5851-B: Adoption Tax Credit

Credit Amount and Limitations

The maximum adoption credit is $15,950 per adopted child. There are income limits that could affect the amount of the credit. IRS – Publication 5851-B: Adoption Tax Credit

This is a non-refundable credit. This means the credit is limited to the amount of tax you owe for the year. Any unused credit can be carried forward for up to five years. IRS – Publication 5851-B: Adoption Tax Credit

For example, if a taxpayer could have received a tax benefit of $2,630 in one year but didn’t claim it, and had they filed a timely tax return, they would have used up the $2,630 and would have been allowed to carry forward $8,000 to the next year. If they had $1,000 of tax liability in the following year and had timely claimed the adoption credit, they would have received $1,000 of tax benefit with a carryforward of $7,000 to the next year. IRS Determination-1211021

Qualified Adoption Expenses

The tax credit is for qualified expenses paid to adopt a child, which include:

Expenses may qualify even if you pay them before an adoptive child is identified. For example, some future adoptive parents pay for a home study at the beginning of the adoption process. You can claim these fees as qualified adoption expenses. IRS – Publication 5851-B: Adoption Tax Credit

Timing of the Credit

The timing of when you can claim the adoption credit depends on the type of adoption:

For domestic adoptions: Claim expenses each year as you incur them, whether you finalize the adoption or identify an eligible child.

For foreign adoptions: Claim expenses once the adoption is final. When it’s final, you can claim all eligible expenses you paid, including in past years.

For adoption of children deemed by a state welfare agency as special needs or hard to place: Claim expenses when the adoption is final. IRS – Adoption Credit

Unfortunately, the rule for parents is that until the adoption becomes final, those expenses don’t generate a credit. This is contrary to the usual pattern in American tax law where you take your deductions in the year you actually pay them out if you’re an individual. But for whatever reason, Congress decided to go with a more formal route here, and rather than allow people the deductions or credit in the year in which they expended the money, Congress decided to give them only in the year in which the adoption becomes final. This benefits people, of course, whose income goes down in the next year or that remains steady in the next year. Dawson U.S. Tax Court Opinions: Cory Joseph & Martha Erin Hoeppner

Filing Requirements for the Credit

To claim the credit, you need to complete Form 8839, Qualified Adoption Expenses, to figure how much credit you can claim on your tax return. IRS – Publication 5851-B: Adoption Tax Credit

The Adoption Credit and any employer-provided adoption benefits that can be excluded from income are computed on Form 8839, Qualified Adoption Expenses. The credit then is entered on Form 1040; for tax year 2018 and forward, the credit is entered on Schedule 3 of Form 1040. IRS IRM 4.19.15 Discretionary Programs

When filing, leave blank any entries you can’t complete yet in Part 1, columns C, D or E. If any of these columns are blank, file a paper return. Keep the adoption documentation with your records. IRS – Adoption Credit

Restrictions on the Credit

You can’t claim this credit for the adoption of your spouse’s child. IRS – Publication 5851-B: Adoption Tax Credit

You can claim qualified adoption expenses paid if you are a registered domestic partner who lives in a state that allows a second parent or co-parent to adopt their partner’s child, if the expenses qualify for the credit. IRS – Publication 5851-B: Adoption Tax Credit

Section 23(a) allows a credit against an individual’s income tax for “qualified adoption expenses paid or incurred by the taxpayer.” If the taxpayer is married at the close of the taxable year, this credit is generally allowed only if the taxpayer and his or her spouse file a joint return for that taxable year (joint filing requirement). Dawson U.S. Tax Court Opinions: Nancy Louise Field Dawson U.S. Tax Court Opinions: Nancy Louise Field

Employer-Provided Adoption Benefits

Employer-provided adoption assistance can be excluded from income. IRS – Publication 5851-B: Adoption Tax Credit IRS – Publication 5851-B: Adoption Tax Credit

Dependency Status and Related Benefits

Qualifying Child Status

An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption. IRS – Instruction 8862: Instructions for Form 8862, Information to Claim Certain Credits After Disallowance

A legally adopted child is treated as your own child. This child includes a child lawfully placed with you for legal adoption. IRS – Publication 502: Medical and Dental Expenses

This means your adopted child can qualify as your dependent, which can make you eligible for various tax benefits:

Child Tax Credit

You may be entitled to claim the child tax credit. Section 24 provides for a tax credit for “each qualifying child of the taxpayer”. Dawson U.S. Tax Court Opinions: Saul Hernandez Ramos

Medical Expenses

You can include medical expenses that you paid for a child before adoption if the child qualified as your dependent when the medical services were provided or when the expenses were paid. If you pay back an adoption agency or other persons for medical expenses they paid under an agreement with you, you are treated as having paid those expenses provided you clearly substantiate that the payment is directly attributable to the medical care of the child. IRS – Publication 502: Medical and Dental Expenses

But if you pay the agency or other person for medical care that was provided and paid for before adoption negotiations began, you can’t include them as medical expenses. IRS – Publication 502: Medical and Dental Expenses

Tax Liability for Adopted Children

If a taxpayer who is otherwise liable for a nonexempt dependent places (or, by operation of law, must place) the nonexempt dependent for adoption or foster care during the taxable year, the taxpayer is liable for the nonexempt dependent only for the full months in the taxable year that precede the month in which the adoption or foster care placement occurs. Tresuary Reg. 1.5000A-1

For example, if a legal adoption occurs on August 15, 2016, and the child meets all requirements under section 152 to be the adoptive parent’s dependent for 2016, the adoptive parent is liable for a shared responsibility payment attributable to the child, if any, for January through July of 2016, but is not liable for a shared responsibility payment attributable to the child for August through December of 2016. The birth parents are not liable for a shared responsibility payment attributable to the child for any month in 2016, because the child is not the birth parents’ dependent for 2016 under section 152. REG-148500-12

Identification Requirements

For tax purposes, a “valid identification number” means a social security number issued to an individual by the Social Security Administration on or before the due date for filing the return for the taxable year. In the case of a dependent who is adopted or placed for adoption, the term “valid identification number” shall include the adoption taxpayer identification number of such dependent. IRC § 6428B(e)

For filing requirements, married couples must file joint returns with rules similar to those in section 21(e). No credit shall be allowed with respect to any eligible child unless the taxpayer includes (if known) the name, age, and TIN of such child on the return of tax for the taxable year. The Secretary may, in lieu of this information, require other information meeting the same purposes, including identification of an agent assisting with the adoption. IRC § 23(f)

Special Considerations for Adoptive Parents

Custody-Related Expenses

It’s important to note that custody-related expenses are not deductible as adoption-related expenses. These would be expenses related to efforts to obtain custody in a dispute with the birth parent of the child in question. Dawson U.S. Tax Court Opinions: Adebayo O. Fayiga & Alejandrina Meraz-Canales

Income Limitations

The credit is subject to an income limitation based on the taxpayer’s modified adjusted gross income (MAGI). IRS IRM 4.19.15 Discretionary Programs

Generation-Skipping Transfer Tax Considerations

For generation-skipping transfer tax purposes, an adopted individual will be treated as a member of the generation that is one generation below the adoptive parent if the individual is: (1) Legally adopted by the adoptive parent; (2) A descendant of a parent of the adoptive parent (or the spouse or former spouse of the adoptive parent); (3) Under the age of 18 at the time of the adoption; and (4) Not adopted primarily for the purpose of avoiding GST tax. Tresuary Reg. 26.2651-2

Practical Steps for Adoptive Parents

  • Keep detailed records: Maintain documentation of all adoption-related expenses.
  • Obtain proper identification: Ensure you have either a Social Security Number or an Adoption Taxpayer Identification Number for your adopted child.
  • Understand timing rules: Know when you can claim expenses based on the type of adoption (domestic, foreign, or special needs).
  • Consider income limitations: Be aware that your income may affect the amount of credit you can claim.
  • File appropriate forms: Complete Form 8839 to claim the Adoption Tax Credit.
  • Consider carryforward options: If you can’t use the full credit in one year, plan for carrying it forward.
  • Consult a tax professional: Given the complexity of adoption-related tax benefits, consider working with a tax professional who has experience with adoption tax issues.

Conclusion

Adoption provides significant tax benefits, primarily through the Adoption Tax Credit, but also by allowing your adopted child to qualify as your dependent for various other tax benefits. Understanding the timing rules, qualified expenses, and filing requirements will help you maximize these benefits while ensuring compliance with tax laws.

Sources:

  • IRS Publication 5851-B: Adoption Tax Credit
  • IRS Adoption Credit webpage
  • IRS Publication 502: Medical and Dental Expenses
  • Various Treasury Regulations and Internal Revenue Code sections

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