Article Highlights:
- What is the Federal Adoption Credit?
- Qualifications for the Credit
- Who is an Eligible Child?
- Credit Amount and Phase-Out Provisions
- Considerations for Special Needs Children
- Qualified Adoption Expenses
- Foreign Adoptions
- Employer Reimbursement Exclusion Amount
- Adoptive Child ID Number
- Credit Carryover
- Cost of Adopting and Ways to Pay It
- Understanding Adoption Costs
- Financing Adoption
Adopting a child can be a difficult process, both emotionally and financially. The United States federal government provides an adoption tax credit, which provides significant assistance to adoptive families. This detailed guide delves into the details of the federal adoption credit, including eligibility, credit amount, phase-out rules, special needs children, qualified expenses, substantiation requirements, employer reimbursement exclusion, and more.
What is the Federal Adoption Credit? - The federal adoption credit is a non-refundable tax credit offered to taxpayers who incur expenses linked to adopting children. This credit helps to offset the significant expenditures associated with adoption, such as legal fees and travel expenses. As a non-refundable credit, it will only offset the tax liability and will not result in a reimbursement from the IRS if the individual's tax liability is zero.
Qualifications for the Credit - To be eligible for the federal adoption credit, prospective parents must have incurred qualified adoption expenses when adopting an eligible child.
Who Is an Eligible Child? For the purposes of this credit, a qualified kid must be under the age of 18 or physically or mentally unable to care for himself or herself. The child can't be:
- A spouse’s child, or
- The result of a surrogacy
"Special needs" adoptions are eligible without requiring expense substantiation, recognizing the significant complications and problems associated with these adoptions.
Credit amount and phase-out provisions – In 2025, the maximum adoption credit is $17,280, up from $16,810 in 2024. The benefit begins to phase out at a Modified Adjusted Gross Income (MAGI) of $259,190 and ends altogether at $299,190. These criteria are adjusted annually for inflation and, unlike other tax-related phaseouts, are consistent across all filing statuses.
Some families are told mistakenly that they would get a large check for the credit amount, which is typically not the case.
Families with adjusted gross incomes (MAGIs) of approximately $250,000 (just below the phaseout) are more likely to benefit the most from the credit, but a family with an AGI of $30,000 will have no tax burden and hence will not benefit from the credit. The credit is nonrefundable, thus once a taxpayer's liability reaches zero, the credit does not apply; nevertheless, see below regarding carryover to the following year.
Some states have their own adoption tax credits as well.
Considerations for Special Needs Children: Adoptions allow for the maximum credit amount, regardless of whether the adopting parent incurs adoption-related expenses. According to the IRS, a kid with special needs cannot or should not return to their birth parents' home and is unlikely to be adopted without support.
Qualified adoption fees include reasonable and necessary costs, such as:
- Adoption fees,
- Court costs,
- Attorney fees, and
- Related travel expenses.
Foreign Adoptions - The credit is only available for the tax year in which the adoption becomes permanent. If the adoption is not finalized, no credit is provided. Additional safe harbors exist to establish when overseas adoptions become final, reducing IRS challenges.
Substantiation and Documentation - Taxpayers are not required to submit substantiating documentation with their return, but they should keep it for future IRS questions. Adoption decrees, placement agreements, and home study reports are all essential documents.
Employer Reimbursement Exclusion Amount - Employers may offer adoption assistance programs, which can reduce the employee’s taxable income up to the amount of the adoption credit limit, which for 2025 is $17,280. However, the credit cannot be used to claim the excluded reimbursement again.
Adoptive Child's ID Number - When submitting for the adoption credit, the adoptive parent must provide the child's Taxpayer Identification Number (TIN) on their return. Usually, this is the child's Social Security number. Prospective adoptive parents who have had a child placed in their household by a "authorized placement agency" and meet certain other requirements may apply for a temporary (two-year) adoption taxpayer identification number (ATIN) for the child, unless the child is an alien eligible to obtain an ITIN, to meet filing requirements. However, in order for a parent to be eligible for the earned income credit or child tax credit, the child must have an SSN rather than an ITIN or ATIN.
Credit Carryover - If the credit exceeds the taxpayer's tax burden, the unused credit can be carried over for up to five years, ensuring that adoptive parents receive the full benefit of the credit.
Cost of Adoption and Payment Options - Aside from tax credits, adoption can be a costly effort. The cost of adoption varies greatly depending on the adoption process picked.
Understanding Adoption Costs. Foster Care Adoption - Typically the least expensive, costing less than $2,800.
1.Independent Adoption - Costs between $20,000 and $45,000, including additional fees for home study and the birth mother's medical expenditures. The adopting parent(s) cannot claim a tax deduction for the birth mother's medical expenditures or use them to calculate the adoption credit.
2.International Adoption - Costs range from $35,000 to $70,000, depending on the country, with additional travel and lodging expenditures.
Financing Adoption - For many families, these expenditures can be prohibitively expensive, necessitating the exploration of financing possibilities.
1.Loans: Home equity loans have attractive terms. However, the interest on a home equity loan is not tax deductible.
2.Adoption Grants: These do not require repayment and are typically provided on a first-come, first-served basis. Search the internet for "adoption grants" to discover participating organizations.
3.State Subsidies - Adoptive parents may qualify for a state subsidy. To learn more about each state's support programs, visit the Families Rising website or search for state adoption subsidies online.
4.Crowdfunding: Websites such as GoFundMe can assist raise funds.
5.Employer help: Some employers provide adoption help as part of their employee benefits package (as detailed above).
6.Prospective Grandparents: Future grandparents might be willing to assist.
The federal adoption tax credit and different funding options provide critical assistance to those who want to expand their families via adoption. Understanding eligibility, recording eligible expenses, and leveraging available financial resources will help make adoption more inexpensive and accessible. With careful planning and knowledge, many more families can enjoy the joy of adoption without incurring significant financial burden.
Contact this office for assistance.
