Adoption is a great option for people who want to have children. However, the process to adopt a child can be extremely expensive which often deters people from taking on the process. If you want to adopt a child from a foreign country, the cost can be even higher. Luckily, there are tax credits you can take for expenses paid for certain adoption expenses!
The whole process of taking adoption credits can seem pretty tricky so I’ll try to break it down into simple steps. When you file a tax return in a given year, you file Form 8839 to claim the adoption credit. Taking the credit varies if your adoption was domestic or foreign. The adoption credit limit for 2015 is $13,400. In order to receive the credit on your tax return, you must have documented qualified adoption expenses for an eligible child. An eligible child is person under the age of 18 or is not physically or mentally capable of taking care of himself. Qualified adoption expenses include any court fees, adoption fees, attorney fees, travel expenses, etc. that are related to the adoption of the child. You cannot deduct expenses incurred for adopting the child of your spouse or for surrogate parenting. Additionally, you cannot deduct expenses for an adoption that were reimbursed by your employer. Now, once you have your list of expenses for your adoption, when do you can take the credit for them?
When you incur expenses for a domestic adoption during the year, and the adoption does not become final during that year, you may be able to receive a credit for those expenses in the following tax year. If the adoption becomes final during the year, you can receive a credit for those expenses in the current year tax return. Odd, right? Here’s an example to simplify it a little. If you spent $5,000 in 2013 for an adoption and it does not become final, you can receive a credit for those expenses on you 2014 tax return. In 2014, you spend $3,000 on the same adoption, and the adoption becomes final that year. You may receive a credit for those expenses on your $2014 tax return. Therefore, your total qualified expenses for your 2014 tax return would be $8,000.
However, taking credit for adoption of foreign children are slightly different. If you incur expenses for a foreign adoption, you cannot deduct those expenses until the year the adoption is final. For instance, if you incur $2,000 in 2012, $3,000 in 2013, and $4,000 in 2014 and the adoption becomes final in 2014, you may receive a credit for all $9,000 of expenses on your 2014 tax return.
Tax Tip: It is extremely important to keep detailed records and receipts of all your adoption expenses since your adoption may span several years. I would recommend creating an excel spreadsheet to keep a detailed record of expenses. You should still keep a file of all receipts for backup.
The credit you can take is subject to AGI limits and phaseouts. For your 2015 tax return, if you make less than $201,010, you can receive a credit for all of your qualified adoption expenses up to the $13,400 limit. Between $201,010 and $241,010 your credit phases out. If you make above $241,010 you will not receive the credit. There is also another limit on the amount of credit you can take for a certain year. If you have qualified adoption expenses for the adoption of the same child of multiple years, the credit you can take is reduced by credit amounts taken in previous years. See the example below for clarification.
Example: Let’s say you took a $4,000 adoption credit on your 2014 tax return. During 2014 you spent $10,000 on qualified adoption expenses which you may receive a credit for on your 2015 tax return. On your 2015 tax return, you take the credit limit of $13,400 and subtract $4,000, the adoption credit taken in the prior year. This comes to $9,400. On your 2015 tax return, AGI limitations permitting, you can take the lesser of the $9,400 or qualified expenses ($10,000 in this case) as your credit. If you took adoption credits for multiple prior years, the same system applies and you would add all of those credits together and subtract them from the current year tax return adoption credit limitation.
If you adopt multiple children, you may be able to take the full credit for each child ($26,800 for two children in 2015). Additionally if you file your tax return as married filing separately in the first year which the credit becomes available, you cannot receive a credit for those expenses. For example, if you incur expenses in 2012 to be credited on your 2013 tax return, but you filed a married filing separate tax return for 2013, you cannot take the credit unless you file an amended return and change your filing status. You can carry forward any unused credit for five years.
Special Needs Child: If you adopt a child that is determined to be special needs, you can receive the maximum credit the year the adoption is final even if you did not pay enough qualified adoption expenses. Special needs are not the same as you would normally think. For a child to be special needs, they must have been a U.S. citizen when the adoption process started, they cannot or should not be returned their parents home, and the child would likely not be adoptable unless assistance is given to the adoptive family.
If adopting a child is the route you are taking, be sure to take into account this credit! If you think you missed an opportunity to take this credit in previous years, you may be able to file an amended return to claim the credit, statute permitting.