Topic no. 607: Adoption Credit and Adoption Assistance Programs
Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion from income for employer-provided adoption assistance. In this article, we will discuss the details of the adoption credit and adoption assistance programs, including eligibility requirements, qualified adoption expenses, income and dollar limitations, timing rules, and filing status considerations.
Qualified Adoption Expenses
For both the adoption credit and the exclusion, qualified adoption expenses include:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Traveling expenses (including amounts spent for meals and lodging while away from home)
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child
It's important to note that an expense may be considered a qualified adoption expense even if it is paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption effort may treat the fees as qualified adoption expenses.
An eligible child is an individual who is under the age of 18 or is physically or mentally incapable of self-care. However, qualified adoption expenses do not include expenses that a taxpayer pays to adopt the child of the taxpayer's spouse.
Additionally, qualified adoption expenses include expenses paid by a registered domestic partner who lives in a state that allows a second parent or co-parent to adopt their partner's child, as long as those expenses otherwise qualify for the credit.
Income and Dollar Limitations
Both the adoption credit and the exclusion are subject to income and dollar limitations. The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (MAGI). If your MAGI amount for the tax year falls between certain dollar limits, your credit or exclusion is subject to a phaseout (reduction or elimination). For tax year 2023, the MAGI phaseout begins at $239,230 and ends at $279,230. If your MAGI amount is below $239,230 for 2023, your credit or exclusion won't be affected by the MAGI phaseout. However, if your MAGI amount for 2023 is $279,230 or more, your credit or exclusion will be zero.
The dollar limitation for the adoption credit must be reduced by the amount of qualified adoption expenses paid and claimed in previous years for the same adoption effort. For example, if you claimed a $3,000 credit in connection with a domestic adoption in 2022 and paid an additional $15,950 of qualified adoption expenses in 2023 (when the adoption became final), the maximum credit you can claim in 2023 is $12,950 ($15,950 dollar limit less $3,000 of qualified adoption expenses claimed in 2022).
In computing the dollar limitation, qualified adoption expenses paid and claimed in connection with an unsuccessful domestic adoption effort must be combined with qualified adoption expenses paid in connection with a subsequent domestic adoption attempt, whether or not the subsequent attempt is successful. For example, if in 2021 an individual claimed $8,000 in qualified adoption expenses in an unsuccessful adoption effort, and in 2022 and 2023 the individual spent a total of $10,000 in qualified adoption expenses in connection with a successful domestic adoption that became final in 2023, the maximum adoption credit allowable in 2023 is $7,950 ($15,950 dollar limit for 2023 less $8,000 previously claimed).
It's important to note that the dollar limitation applies separately to both the credit and the exclusion, and you may be able to claim both the credit and the exclusion for qualified expenses. However, you must claim any allowable exclusion before claiming any allowable credit. Expenses used for the exclusion reduce the amount of qualified adoption expenses available for the credit. As a result, you can't claim both a credit and an exclusion for the same expenses.
Timing Rules
The tax year for which you can claim the adoption credit depends on the timing of the expenses, the type of adoption (domestic or foreign), and when the adoption was finalized.
For a domestic adoption (the adoption of a U.S. child), qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment, even if the adoption is never finalized and even if an eligible child was never identified.
For a foreign adoption (the adoption of an eligible child who isn't yet a citizen or resident of the U.S. or its territories), qualified adoption expenses paid before and during the year are allowable as a credit for the year when the adoption becomes final.
Once an adoption becomes final, and subject to the dollar limitation, qualified adoption expenses paid during or after the year of finality are allowable as a credit for the year of payment, whether the adoption is foreign or domestic.
As a result of the timing rules, qualified adoption expenses allowable in the current year may include expenses paid in a former year or years.
Adoption of U.S. Children with Special Needs
If you adopt a U.S. child that a state has determined to have special needs, you may be eligible for the maximum amount of credit in the year of finality. The maximum credit allowable generally would be $15,950 if the adoption of a child whom a state has determined has special needs becomes final in 2023. However, the maximum amount will be reduced by any qualified adoption expenses you claimed for the same child in a prior year or years, and the MAGI limitation may apply.
If you adopt a child whom a state has determined has special needs, and if your employer has a written qualified adoption assistance program, you may be eligible for the exclusion, even if you or your employer didn't pay any qualified adoption expenses.
A child is considered to have special needs for the purpose of adoption expenses if:
- The child is a citizen or resident of the United States or its territories when the adoption effort began
- A state determines that the child can't or shouldn't be returned to their parents' home
- The state determines that the child probably won't be adoptable without assistance provided to the adoptive family
It's important to note that the definition of "children with special needs" for the adoption credit may differ from other definitions of "children with special needs." Foreign children are not considered to have special needs for the adoption credit, and even U.S. children with disabilities may not have special needs for the adoption credit. Generally, "special needs adoptions" refer to the adoptions of children whom the state's child welfare agency considers difficult to place for adoption.
Filing Status
To determine your filing status, refer to Publication 501, Dependents, Standard Deduction, and Filing Information, and the "What is my filing status?" section.
If you filed your return using the married filing separately filing status in the year when particular qualified adoption expenses are first allowable, you generally can't claim the credit or exclusion for those expenses. You may need to file an amended return to change to a qualifying filing status within the period of limitations. However, there is an exception for certain taxpayers living apart from their spouse and meeting other requirements. Please refer to the "Married Persons Not Filing Jointly" section in the Instructions for Form 8839 for more information.
Form 8839 and Instructions
To claim the adoption credit or exclusion, complete Form 8839, Qualified Adoption Expenses, and attach the form to your Form 1040, U.S. Individual Income Tax Return, Form 1040-SR, U.S. Tax Return for Seniors, or Form 1040-NR, U.S. Nonresident Alien Income Tax Return. The Instructions for Form 8839 contain additional information about the adoption credit and exclusion.
Please note that you are no longer required to attach the adoption documentation with your tax return. However, you must keep the documentation as part of your records. The IRS encourages taxpayers to e-file their federal income tax returns. Form 8839 can be e-filed with Form 1040, Form 1040-SR, or Form 1040-NR. Therefore, taxpayers who e-file their tax returns need not print and mail completed forms to the IRS.
For more information about eligibility for claiming a credit for adopting a child or excluding employer-provided adoption benefits, visit the IRS website.