Adoption Credit Eligibility

What is the Adoption Credit?

The adoption tax credit is a non-refundable federal tax credit designed to help offset the significant costs associated with adopting a child. Established under the Internal Revenue Code Section 36C, this credit allows eligible taxpayers to reduce their federal income tax liability dollar-for-dollar based on the qualified adoption expenses they incur during the adoption process.

The maximum adoption credit amount is adjusted annually for inflation. For the 2023 tax year, the maximum credit per eligible child was $15,950. This means that adoptive parents can claim up to this amount in qualified expenses for each child they adopt, significantly reducing the financial burden of the adoption process. The credit applies to both domestic and international adoptions, as well as adoptions from the foster care system, though the rules differ slightly depending on the type of adoption.

It is important to understand that because the adoption credit is non-refundable, it can only reduce your tax liability to zero — it cannot generate a tax refund. However, any unused credit can be carried forward for up to five years, giving you additional time to fully utilize the benefit if your tax liability in the year of adoption is not large enough to absorb the entire credit.

How Does Income Affect Eligibility?

Your income plays a critical role in determining whether you can claim the adoption credit and how much of it you can receive. The IRS uses your Modified Adjusted Gross Income (MAGI) to determine eligibility and calculate any phase-out reductions.

Modified Adjusted Gross Income (MAGI) is your adjusted gross income (AGI) with certain deductions added back in, such as foreign earned income exclusion, foreign housing exclusion, and income from Puerto Rico or American Samoa. For most taxpayers, MAGI is very close to or identical to their AGI.

The adoption credit is subject to an income-based phase-out. For the 2023 tax year, the phase-out begins when your MAGI reaches $239,230 and the credit is completely eliminated when your MAGI exceeds $279,230. This means:

• MAGI below $239,230: You are eligible for the full adoption credit amount, up to the maximum per child.
• MAGI between $239,230 and $279,230: Your credit is gradually reduced. The reduction is calculated proportionally — the higher your MAGI within this range, the smaller your credit becomes.
• MAGI above $279,230: You are not eligible for the adoption credit at all, regardless of the expenses you incurred.

The phase-out calculation uses the following formula: the credit is reduced by the ratio of (your MAGI minus the phase-out threshold) divided by (the phase-out range of $40,000). Understanding where your income falls relative to these thresholds is essential for tax planning purposes, especially if your MAGI is near the phase-out range.

Qualified Adoption Expenses

Not all costs associated with adoption qualify for the tax credit. The IRS defines qualified adoption expenses as reasonable and necessary expenses directly related to the legal adoption of an eligible child. These include:

• Adoption agency fees: Fees paid to licensed adoption agencies for their services in facilitating the adoption process.
• Court costs and legal fees: Attorney fees, filing fees, and other legal expenses directly related to the adoption proceedings.
• Travel expenses: Costs for transportation, meals, and lodging while away from home that are directly related to the adoption, including trips to meet the child, attend court hearings, or complete required home studies.
• Home study costs: Fees for the required home study evaluation, which assesses the suitability of the adoptive family's home environment.
• Document preparation: Costs for obtaining and preparing necessary documents such as birth certificates, immigration papers, and medical records.

Expenses that do not qualify include costs for adopting a spouse's child (stepchild adoption), expenses paid using funds from federal, state, or local programs, expenses that violate state or federal law, and any costs reimbursed by an employer adoption assistance program (though employer assistance may be excluded from income separately).

Special Needs Adoptions

The tax code provides a significant advantage for families who adopt children with special needs from the U.S. foster care system. In a special needs adoption, you can claim the full maximum credit amount regardless of your actual out-of-pocket expenses — even if your qualified adoption expenses are zero.

A child is considered to have "special needs" for tax purposes if all three of the following conditions are met:

• The child is a U.S. citizen or resident at the time the adoption process begins.
• A state agency has determined that the child cannot or should not be returned to their birth parents' home.
• The state has determined that the child will likely not be adopted unless assistance is provided to the adoptive family. This determination may be based on factors such as the child's age, ethnicity, membership in a sibling group, medical conditions, physical or emotional disabilities, or other relevant circumstances.

This provision ensures that the financial incentive for adopting children with special needs remains strong, even when the adoption itself involves minimal direct expenses because many costs are covered by state or federal subsidies.

How to Claim the Adoption Credit

Claiming the adoption credit involves a specific process. Follow these five steps to ensure you claim the credit correctly:

1. Determine Eligibility: Confirm that your MAGI falls within the eligible range and that you adopted an eligible child — generally any individual under age 18, or a person who is physically or mentally incapable of self-care. Verify that your expenses qualify under IRS guidelines.
2. Calculate Your Qualified Expenses: Total all qualifying adoption expenses you paid during the tax year. Keep in mind that the timing of when you can claim the credit depends on whether the adoption is domestic or international. For domestic adoptions, expenses paid before the year the adoption becomes final are claimed in the year after they are paid. For international adoptions, expenses can only be claimed in the year the adoption becomes final.
3. Complete IRS Form 8839: Fill out Form 8839, "Qualified Adoption Expenses." This form calculates your credit amount, applies the MAGI phase-out if applicable, and determines the credit you can claim on your tax return. You will need to provide the child's name, date of birth, taxpayer identification number (or ATIN if a Social Security number has not yet been assigned), and information about whether the child has special needs.
4. Attach Supporting Documentation: Include all necessary supporting documents with your tax return. This may include the adoption decree or final court order, placement agreements, receipts for qualified expenses, and any documentation of the child's special needs status. Keep copies of all documents for your records.
5. File Your Tax Return: Submit your completed tax return with Form 8839 attached. If you are unable to use the full credit in the current year because your tax liability is less than the credit amount, the unused portion can be carried forward for up to five years. Track the carryforward amount carefully to ensure you claim it in subsequent years.

Important Documents You'll Need

Proper documentation is essential for successfully claiming the adoption credit. Gather and organize the following documents before preparing your tax return:

• Adoption decree or final order: The official court document confirming the legal adoption of the child. This is the most critical piece of documentation.
• Receipts and invoices: Itemized records of all qualified adoption expenses, including agency fees, legal fees, court costs, travel expenses, and home study fees.
• Proof of payment: Bank statements, canceled checks, credit card statements, or payment confirmations showing that you actually paid the claimed expenses.
• Child's identification: The child's Social Security number or Adoption Taxpayer Identification Number (ATIN). If a Social Security number has not yet been issued, you can apply for an ATIN using IRS Form W-7A.
• Special needs determination: If applicable, documentation from a state agency confirming that the child meets the special needs criteria. This is essential for claiming the full credit regardless of actual expenses.
• Employer adoption assistance records: If your employer provided adoption assistance benefits, obtain records showing the amounts provided. These amounts must be coordinated with your credit claim to avoid duplication.
• Prior year carryforward records: If you are carrying forward unused credit from a previous year, maintain records of the original credit amount, the amount used in prior years, and the remaining balance available for the current year.