Child Tax Credit: What is the adoption tax credit and who qualifies?

Child Tax Credit rules
Child Tax Credit rules
Khushbu Kumari

The US federal government wants to encourage adoptions and has established an adoption tax credit . This generous credit is a permanent part of the tax law.

To adopt a child is expensive. If you try to adopt a minor through an adoption agency or privately, the process can cost anywhere from $5,000 to $40,000 or more. On the other hand, international adoptions can range between 7,000 and up to 30,000 dollars.

The US federal government wants to encourage adoptions and has established an adoption tax credit . This generous credit is a permanent part of the tax law. For this 2022, the amount of the allowable adoption credit is $14,890.

The adoption process can be cumbersome and expensive. In fact, according to ' US News and World Report ', the cost of adopting a child can exceed $50,000 .

But to alleviate some of these fees and expenses, the IRS offers an adoption tax credit, known as the ' Child Tax Credit ,' along with other favorable tax treatment related to employer-provided adoption assistance. Most adoptive parents have access to these adoption tax benefits.

Here's what you need to know to learn more about this adoption tax credit,

What is the adoption tax credit or 'Child Tax Credit'?

The 'Child Tax Credit' is a non-refundable tax credit intended to alleviate qualified costs incurred when adopting a child. The credit is adjusted for inflation and amounts to $14,890 in 2022.

To claim the credit, you must file Form 8839, ' Qualified Adoption Expenses ', and meet the modified adjusted gross income (MAGI) limits. The credit is phased out between modified adjusted gross income of $216,600 and $256,660 in 2021.

Due to the non-refundable nature of the credit , if you can't use the full value of the credit in the first year you claim it, you can carry the remaining amount forward up to five years.

For example, if you claim the full credit in 2021 but only have $10,000 in tax debt, the credit balance of $4,440 carries over to the next year to adopt a qualifying child.

The IRS defines an eligible child as any person under the age of 18 or any person who - regardless of age - qualifies as disabled and physically or mentally incapable of self-care.

The amount of credit you can claim is related to the amount you spend on an adoption. For example, if you paid $8,000 in qualified adoption expenses in 2021, you cannot claim the full credit of $14,440. Similarly, if you paid $25,000 in expenses, you can only claim the maximum value of the credit.

What is the special needs exception?

The adoption of a child who has been determined by the State to have special needs carries specific tax considerations . In the case of the adoption credit, special needs does not necessarily mean that the child has a disability or medical condition. For the adoption credit, a child with special needs is one who is classified as "difficult to place" for adoption without financial assistance.

To be considered a child with special needs, you must meet each of these three conditions:

  1. The child is a citizen or resident of the United States.
  2. The state determines that the child should not, or could not, be returned to his or her parents' home.
  3. The state determines that the child probably would not have been adopted if assistance had not been provided.
  4. If you adopted a child with special needs, you can generally claim the full credit in the year the adoption was finalized.

If you do not know if the child qualifies for the special needs category, you should review the adoption paperwork and consult your state agency or caseworker.

Once you adopt your child and claim the adoption credit, you will not receive any more federal adoption-related tax benefits in future years. From then on, your child will be considered a dependent child on your tax return.

Who qualifies for the Child Tax Credit?

You may be eligible for the adoption tax credit if you incur out-of-pocket expenses to adopt a child under the age of 18, or a child of any age who is physically or mentally disabled.

The child may be a US citizen or alien, or a nonresident alien. If you are trying to adopt an American child, you can apply for the credit before the adoption is final.

But the credit is not available to taxpayers with higher income levels. The adoption credit begins to disappear if your modified adjusted gross income (MAGI) is greater than $223,410 in 2022 ($216,660 in 2021), and disappears entirely for taxpayers with a MAGI greater than $263,410 in 2022 ($256,600 in 2021).

What are qualified adoption expenses?

If you have decided to adopt a child, you can claim the adoption credit for qualified adoption expenses. You can account for these expenses even before you have identified an eligible child.

The IRS defines qualified adoption expenses as any reasonable and necessary expense directly related to the legal adoption of any child. These can be refunded or returned through the adoption credit.

Those expenses include:

  1. Reasonable and necessary adoption expenses
  2. Court costs and attorney fees
  3. home studies
  4. Adoption-related travel, meal, and lodging expenses while away from home
  5. Allowable adoption expenses do not include any expenses you paid to adopt your spouse's child. In other words, the adoption of your stepchildren cannot be considered an eligible adoption expense.

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