What Adoption Expenses and Fees Are Tax Deductible?
There are a lot of kids out there in need of a loving home and caring family. Unfortunately, many families who would adopt are concerned about the financial costs of raising an extra child. However, there are some financial incentives to help defer the costs of taking care of an adopted child. The adoption process can be long and expensive, with adoption costs, legal expenses, and medical costs. Some adoption expenses and fees may be tax-deductible to help reduce your federal tax liability after adoption.
If you have adoption questions, you shouldn't hesitate to speak with a dedicated adoption attorney. They can address your situation and answer any legal or procedural questions you have.
Federal Tax Programs for Adoptive Families
The Internal Revenue Service (IRS) oversees the processing of federal income taxes. Each year, individuals and married couples with income have to fill out their tax returns, report all income, and determine if they end up with a refund or owing money to the IRS. There are several tax credits and additional deductions available for taxpayers. For adoptive parents who are adopting a child, IRS federal programs that could offer financial help include:
- Adoption tax credit
- Income exclusion for employer-provided adoption benefits
Some states, such as California, may offer additional tax incentives for adopting families. You can check out your state's tax provisions for more information or contact an experienced adoption attorney for adoption assistance.
Federal Adoption Tax Credit
Under federal income tax law, a non-refundable credit is available for qualified adoption expenses paid to adopt an eligible child. The tax credit is reduced for taxpayers based on income limits. For the tax year 2020, the credit began to phase out with a modified adjusted gross income (MAGI) of over $214,520, and completely phased out for a MAGI of $254,520 or more.
Adoption tax credit form 8839 is used to determine the amount of the adoption credit. For the tax year 2020, the maximum adoption credit dollar amount available was $14,300 per child. There may be additional restrictions, so make sure your adoption meets the eligibility requirements before filing your federal return.
What Are Qualifying Adoption Expenses?
According to the IRS, qualified adoption expenses are the reasonable and necessary expenses related to the legal adoption of an eligible child. Examples of qualified adoption expenses include:
- Adoption fees
- Attorney fees
- Adoption agency fees
- Court costs
- Travel expenses while away from home
- Re-adoption expenses for foreign adoptions
If you paid fees but received funds to cover those fees from another government program or employer reimbursement, those fees may not be qualified expenses. Fees for carrying out a surrogate parenting arrangement are also not qualified. If you are adopting the birth child of your spouse, you may also not qualify.
Income Exclusion for Employer-provided Adoption Benefits
Some employers provide adoption benefits to encourage adoption. If you received benefits paid by your employer directly to you or a 3rd-party for adoption expenses, you might be able to exclude those benefits from your income. The maximum exclusion amount for employer-provided adoption benefits for 2020 is the sam1e as for the adoption tax maximum credit of $14,300 per child.
Employer-provided adoption benefits generally appear in box 12 of your W-2 tax form. If the adoption qualifies, you may be able to exclude this amount from your income to reduce your federal income tax liability.
Can I Combine Adoption Benefits Exclusion and the Tax Credit?
The adoption tax credit and exclusion are separate but related tax benefits. You may be able to use both the tax benefits for qualifying adoption taxes. For example, if your qualified adoption expenses included $10,000 in adoption fees, $10,000 in legal fees, and $4,000 in travel expenses, that would be more than the tax credit. However, if your employer covers the $10,000 in adoption-related legal fees, you may be able to exclude the $10,000 from income and claim the remaining $14,000 in adoption fees and travel under the credit.
However, you cannot “double-dip" benefits. If your employer-provided benefits for expenses, those expenses no longer qualify under the tax credit.
When Can I Claim the Adoption Tax Credit?
When you can claim the tax credit may depend on when you pay the expenses and when the adoption becomes final. For any expenses paid in the year the adoption becomes final, the credit is taken in the tax year the adoption becomes final. If the expenses are paid before the adoption is finalized, you can take the credit the year after payment. If expenses are paid out after the adoption is final, the credit is taken the year of the payment.
However, for adoptions of a foreign child, the tax credit or exclusion cannot be taken until the year the adoption becomes final, or the year of the payment for any expenses after the adoption is final.