What is the Adoption Tax Credit?
The Adoption Tax Credit is a non-refundable credit that helps adoptive families (not stepparent adoption) offset qualified adoption expenses. It aims to alleviate some of the financial burdens associated with the adoption process, making it more accessible for families considering adoption.
Who is Eligible for the Adoption Tax Credit?
Eligibility for the Adoption Tax Credit is available to adoptive parents who have incurred qualifying adoption expenses. These expenses must be directly related to adopting an eligible child, whether domestic or international. Children who receive adoption assistance from their state qualify for the full amount of the credit regardless of actual expenses incurred.
Qualifying Expenses for the Adoption Tax Credit
What Expenses are Eligible for the Adoption Tax Credit?
Qualified adoption expenses include “reasonable” and necessary adoption fees, court costs, attorney fees, travel expenses, and other expenses directly related to the legal adoption of a child. It’s essential to keep detailed records and receipts for all expenses incurred.
Documentation Requirements
Documentation is crucial when claiming the Adoption Tax Credit. Adoptive parents must maintain accurate records of all adoption-related expenses, including receipts, invoices, contracts, adoption agency agreements, adoption assistance agreements (for special needs adoption), and proof of adoption. These documents will be necessary to support the claim in case of an IRS audit.
Limitations and Phase-Out
Maximum Credit Amount
The maximum Adoption Tax Credit amount for 2026 is $17,670 per child. This amount is subject to change annually due to inflation adjustments. However, the credit is non-refundable, meaning it can only reduce the adoptive parents’ tax liability to zero. Any excess credit cannot be refunded.
Income Limitations
Income limitations apply to the Adoption Tax Credit, affecting the amount of credit available to adoptive parents. As income increases, the credit gradually “phases out” until it is no longer available for higher-income families. For 2023 the phase begins at $265,080 and is completely phased out at $305,080.
How to Claim the Adoption Tax Credit
Completing IRS Form 8839
To claim the Adoption Tax Credit, adoptive parents must complete IRS Form 8839, Qualified Adoption Expenses. For families doing their taxes, you will have to enter into the credit section to select this form and work through the prompts. Most families use software themselves or hire tax preparers who use software, the software will calculate how much credit you can use this year.
The credit will directly reduce their tax liability for the year in which the adoption is finalized. Any unused credit will carry forward to the next tax year, and up to five additional years (for a total of six years).