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9 Tax Benefits When Adopting a Child

Marge Cook
9 Tax Benefits When Adopting a Child

Everybody knows that having a child can be expensive, but the process of adopting a child has its own unique expenses, costs, and joys. There are a number of legal hoops to jump through in order to ensure that adoptions are in full compliance with all of the laws, and these will likely generate legal bills. Depending upon the individual situation the process may necessitate travel, medical bills, or other out-out-of-pocket expenses that do not arise in non-adoption scenarios. 

In recognition of the additional expense, stress, and complexity, the Internal Revenue Service has provided tax credits specifically designed for those who adopt. The adoption credit has its own rules and limitations – here are the nine things that you need to know if you've adopted a child during the previous tax year: 

  1. Maximum Benefit: For tax year 2015, there is a maximum per child adoption tax credit/exclusion of $13,400.
  2. Credit or Exclusion: If you adopt a child with the help of a written qualified adoption assistance program from your employer, you may be able to exclude the compensation that you received for the adoption from your taxable income. Whether you take advantage of the adoption tax credit or this exclusion, the tax advantage will not provide a refund. It may, however, reduce the tax that you owe for the tax year to nothing.
  3. Credit Carryover: If the adoption results in a credit that exceeds your tax liability for the year in which you adopted the child, you are able to extend the benefit of your credit into the next year. The credit can be carried forward to reduce future tax liability for up to five years.
  4. Qualified Expenses: The adoption tax credit is limited to expenses that are considered reasonable and necessary to the adoption, and must be directly related to the process. Typical expenses include the costs involved with the legal process such as court fees and attorneys' fees, medical costs for the birth mother, and travel costs.
  5. Eligible Child: In order to take the tax credit, the child who is being adopted must be either under the age of 18 or be unable to care for themselves due to a physical or mental disability.
  6. Special Needs Child: If the child that you adopt is under the age of 18 and has a physical or mental disability, and the adoption is final, you may be eligible for the maximum tax credit despite having no associated qualifying adoption expenses.
  7. Income Limits: There is an income threshold for taking the adoption tax credit or exclusion. This threshold may lower the maximum tax credit that can be taken, or may eliminate it entirely.
  8. Domestic or Foreign Adoptions: Although the adoption tax credit is generally available regardless of whether a child is adopted domestically or from a foreign country, there are some instances in which a foreign adoption may have an impact on whether an expense can be applied in a specific tax year.
  9. No Double Benefit: Though there are certain circumstances in which adoptive parents can claim both a tax credit and a tax exclusion for the costs of an adoption, they cannot tax both for the same expense.

 Adopting a child is a process that entails a great deal of paperwork and expense. In order to minimize additional complexity and ensure that you are getting the maximum tax benefit that you are owed, consult with a tax professional.

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Marge Cook

Marge Cook

Based in Rhinelander, WI, Marge Cook has been a Tax and Accounting professional for 8 years. She specializes in small businesses and is certified as an Accounting Services Professional, Professional Bookkeeper, Professional Tax Preparer, and a QuickBooks ProAdvisor. Prior to starting Custom Accounting Services, she worked in Management at both McDonalds and Walmart.

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