A nonrefundable tax credit for qualified adoption expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs, even if you do not have any qualified expenses. The credit is reduced if your modified adjusted gross income (MAGI) falls between $201,010 and $241,010; and is zero if your MAGI is above $241,010. In addition, there is an income exclusion for employer-provided adoption assistance.
Adoption Tax Credit
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. The credit is nonrefundable, which means it is limited to your tax liability for the year. However, any credit in excess of your tax liability may be carried forward for up to five years. The maximum amount (dollar limit) for 2015 is $13,400 per child.
What are Qualified Adoption Expenses?
For both the credit and the exclusion, qualified adoption expenses, defined in section 23(d)(1) of the Code, include:
- Reasonable and necessary adoption fees,
- Court costs and attorney fees,
- Traveling expenses (including amounts spent for meals and lodging while away from home), and
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
An expense may be a qualified adoption expense even if the expense 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.
Qualified adoption expenses do not include expenses that a taxpayer pays to adopt the child of the taxpayer’s spouse.
Qualified adoption expenses include expenses paid by a registered domestic partner who lives in a state that allows same-sex second parent or co-parent to adopt his or her partner’s child, adoption expenses and that otherwise qualify for the credit.
Adoption Tax Credit Examples
Example 1. In 2015, the following events occur: (a) You pay $13,400 of qualified adoption expenses in connection with an adoption of an eligible child; (b) your employer reimburses you for $3,400 of those expenses; and (3) the adoption becomes final. Your MAGI amount for 2015 is less than $201,010. Assuming you meet all other requirements, you can exclude $3,400 from your gross income for 2015. However, the expenses allowable for the adoption credit are limited to $10,000 ($13,400 total expenses paid less $3,400 employer reimbursement).
Example 2. The facts are the same as in Example 1, except that you pay $18,400 of qualified adoption expenses and your employer reimburses you for $5,000 of those expenses. Assuming you meet all other requirements, you can exclude $5,000 from your gross income for 2015 and claim a $13,400 adoption credit ($18,400 total expenses paid less $5,000 employer reimbursement).
Example 3. The facts are the same as in Example 1, except that you pay $30,000 of qualified adoption expenses and your employer reimburses you for $13,400 of those expenses. Assuming you meet all other requirements, you can exclude $13,400 from your gross income for 2015. You can also claim a credit of $13,400. Because of the dollar limitation, the remaining $3,200 of expenses ($30,000 total expenses paid, less $13,400 dollar-limited exclusion, less $13,400 dollar-limited credit), can never be used for either the exclusion or the adoption credit.