Adopting a child can be expensive, but luckily, the Internal Revenue Service allows you to offset some of the expenses with a tax credit. This credit can be a bit complicated, but here's what you need to know.
Who Can Claim the Adoption Tax Credit?
You can claim the adoption tax credit if you adopt a child from the United States or abroad. To claim the full amount of the credit, you must earn under a certain amount. As of 2016, the income limit is $241,920, and that refers to your modified adjusted gross income. If you earn over $201,920, you can only claim a partial credit.
How Much Is the Adoption Credit?
The adoption credit is equal to the expenses you have incurred up to $13,460. The time limits vary based on whether you are adopting a child domestically or internationally, but in most cases, you can claim expenses over a two or three year time period. However, the limit applies to the total for all those years put together. You don't get to claim $13,460 every year.
What Expenses Qualify for the Adoption Credit?
One of the trickiest aspects of navigating an adoption is dealing with adoption law. As a result, you can claim your attorney expenses as part of the tax credit. You can also claim expenses related to legal aspects such as court costs and filing fees.
At the same time, you can claim other general adoption costs such as paying for a home visit (where the social worker determines that your home is a good fit for a child), traveling for an international adoption, and other directly related expenses. You cannot claim costs like buying a bed, purchasing toys, or setting up the adoptive child's room.
How Do You Claim the Adoption Tax Credit?
To claim the tax return for adoption expenses, you can fill out IRS Form 8839. This form allows you to list your expenses, and it takes you through a number of calculations to figure out the credit. If your boss paid some of your expenses, you can typically deduct those amounts from your income, and this form helps with that too.
You don't have to send receipts with this form, but you need to keep them for your records. In particular, you should keep all the receipts from your adoption attorney as well as any other receipts. Remember to ask the professionals you work with for invoices or receipts so that you don't miss out on the credit.
Can You Claim Additional Credits?
In addition to the credit for adoption expenses, you can also claim additional credits. In particular, once the adoption is finalized, you can claim the child credit for your adopted child just as you can for a natural born child. As of 2016, this credit is for $1,000, and it's for children under the age of 17.
What About Expenses for the Birth Mother?
One of the trickiest aspects of adoption law deals with expenses related to the birth mother. In many cases, birth mothers go on Medicaid or state-funded insurance plans to cover their hospital costs. However, in some cases, the adoptive parents may decide to cover these costs.
If you decide to cover these costs, you need to check with an accountant to see if you can include them as part of your adoption expenses. The IRS's guide does not list those expenses in the summary of allowable expenses. Even more importantly, you need to consult with an expert in adoption law. If the birth mother changes her mind, you need to know whether you forfeit those funds or not. In some states such as New York, you are not legally allowed to recoup expenses paid on behalf of the mother.