Here’s what HIVE AI had to say about “How does the Adoption Tax Credit work, and what is the maximum amount?”:
How the Adoption Tax Credit Works and Maximum Amount
The Adoption Tax Credit is a federal tax benefit that allows eligible taxpayers to claim up to $16,810 in qualified adoption expenses for 2024. If you receive adoption benefits from your employer, you can also exclude up to $16,810 of those benefits from your income. The credit applies to international, domestic, private, or public foster care adoptions. It’s important to note that the credit is nonrefundable, meaning you can’t get back more than you owe in taxes. IRS – Adoption Credit
Maximum Credit Amount
The maximum adoption credit is $15,950 per adopted child. IRS – Publication 5851-B: Adoption Tax Credit IRS – Publication 5851-B: Adoption Tax Credit However, this amount is from a previous tax year. For 2024, the maximum credit has increased to $16,810 per eligible child. IRS – Adoption Credit
The adoption credit’s dollar limitation is indexed for inflation, which means it increases over time. IRS Determination-1212015 For example, for taxable years beginning in 2018, the credit allowed for an adoption of a child with special needs was $13,810, and the maximum credit allowed for other adoptions was the amount of qualified adoption expenses up to $13,810. Rev. Proc. 2018–18
Income Limitations
You are eligible for the Adoption Credit if your modified adjusted gross income is $252,150 or less in 2024. The credit is reduced for incomes between $252,151 and $292,150 and unavailable if your income exceeds $292,150. IRS – Adoption Credit
This is a significant increase from previous years. For comparison, in 2018, the available adoption credit began to phase out for taxpayers with modified adjusted gross income in excess of $207,140 and was completely phased out for taxpayers with modified adjusted gross income of $247,140 or more. Rev. Proc. 2018–18
Eligibility Requirements
To qualify for the Adoption Tax Credit:
If married, you must file jointly to claim the credit. IRS – Adoption Credit
You may qualify if you’re a registered domestic partner in a state that allows second-parent adoption. However, you cannot claim the credit for expenses related to adopting your spouse’s child. IRS – Adoption Credit
A “qualified child” for the Adoption Credit must be:
- Under age 18, or
- Physically or mentally incapable of self-care.
For special needs adoptions, a child qualifies if they:
- Are a U.S. citizen,
- Cannot return to their parents’ home, and
- Are unlikely to be adopted without assistance. IRS – Adoption Credit
Qualified Adoption Expenses
Qualified expenses include:
- Reasonable and necessary adoption fees
- Court costs and legal fees
- Adoption-related travel expenses like meals and lodging
- Other expenses directly related to the legal adoption of a qualified child IRS – Publication 5851-B: Adoption Tax Credit
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
According to Section 36C of the Internal Revenue Code, “The credit under paragraph 1 with respect to any expense shall be allowed in the case of any expense paid or incurred before the taxable year in which such adoption becomes final for the taxable year following the taxable year during which such expenses paid or incurred.” Dawson U.S. Tax Court Opinions: Cory Joseph & Martha Erin Hoeppner
This means:
- For expenses paid before the year the adoption is finalized, you claim the credit in the year after you paid the expenses
- For expenses paid in the year the adoption is finalized or later, you claim the credit in the year you paid the expenses
Special Rules for Special Needs Adoptions
Under §§ 36C(a)(3) and 36C(d)(3), a taxpayer may claim the credit up to the full amount of the dollar limitation for an adoption of a child with special needs, as determined by the state where the adoption occurs, in the year in which the adoption is final without regard to the amount of qualified adoption expenses the taxpayer pays or incurs. Notice 2010-66
This means that for special needs adoptions, you can claim the full credit amount in the year the adoption is finalized, even if your actual expenses were less than the maximum credit amount.
Carryforward Provisions
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 2010, the adoption credit was allowed under section 36C and was refundable. Prior to 2010, the credit was allowed under section 23 and was nonrefundable. For years prior to 2010, section 23(c) allowed taxpayers to carry forward to the succeeding taxable year any portion of the credit they were unable to use in the current year because such amount exceeded their tax liability. However, no credit was allowed to be carried forward “to any taxable year following the fifth taxable year after the taxable year in which the credit arose.” Dawson U.S. Tax Court Opinions: Estelle Frazier
Coordination with Employer Benefits
The income exclusion for employer-provided adoption benefits is in addition to the credit, but you can’t claim both for the same expenses. You must claim any allowable exclusion before claiming any allowable credit. To do this, complete Part III of Form 8839 before you complete Part II. IRS – Adoption Credit
For example: In 2024, if you paid $10,000 in qualified adoption expenses, and your employer reimbursed you for $4,000, you can exclude $4,000 from your income. Your maximum credit would be $6,000 ($10,000 less the $4,000 employer reimbursement). IRS – Adoption Credit
Multiple Year Adoptions
The credit amount applies to each adoption of a child, not each calendar year. If you claim expenses in more than one year for the same adoption effort, you must subtract past credit amounts you claimed from your remaining credit. IRS – Adoption Credit
For example: If you claimed a $3,000 adoption credit last year and paid $16,810 in expenses this year, you can claim a credit of only $13,810 in 2024 ($16,810 less the $3,000 credit you previously claimed). IRS – Adoption Credit
Expenses for an unsuccessful domestic adoption of an identified child are aggregated with the expenses of a successful adoption of another child in applying the dollar limitation. Notice 2010-66
How to Claim the Credit
To claim the credit, 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
Conclusion
The Adoption Tax Credit provides significant financial assistance to families who adopt children, offering up to $16,810 per child for 2024. While the credit is nonrefundable, unused portions can be carried forward for up to five years. The credit applies to various types of adoptions, including international, domestic, private, and public foster care adoptions. Special provisions exist for special needs adoptions, allowing families to claim the full credit amount regardless of actual expenses incurred.
Remember that income limitations apply, and the credit begins to phase out for taxpayers with modified adjusted gross income above $252,150 in 2024. Proper timing of when to claim the credit depends on when expenses are paid relative to when the adoption becomes final.
Sources:
- IRS – Adoption Credit
- IRS – Publication 5851-B: Adoption Tax Credit
- Rev. Proc. 2018-18
- Notice 2010-66
- Rev. Proc. 2010-40
- IRS Determination-1212015
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