Article Highlights:
- What is the Adoption Credit
- Eligibility Criteria
- Maximum Credit Amount and Phase-Out
- Interaction with the Alternative Minimum Tax
- Unused Credit Carryover
- Employer-Reimbursed Expenses
- Failed Adoption of a U.S. Child
- Adoptive Child ID Number
Adoption may be a life-changing experience for many families, providing a unique chance to expand their family while also providing a loving home to a child in need. However, the procedure may be costly, with several fees involved. Recognizing this, the United States government provides an adoption credit to assist offset some of the financial costs involved with adoption. This page looks into the complexities of the adoption credit, such as qualifying requirements, the maximum credit amount, specific considerations when adopting a special needs kid, and how the credit interacts with the Alternative Minimum Tax (AMT).
- What is the Adoption Credit - The adoption credit is a federal, non-refundable tax benefit that can assist cover some of the expenses involved with the adoption process. This covers adoption fees, court charges, attorney fees, travel expenses (where applicable), and other expenditures directly associated to the legal adoption of an eligible child. The credit is intended to encourage adoption by minimizing the financial burden on adoptive parents.
- Eligibility Criteria - To be eligible for the adoption credit, taxpayers must fulfill certain requirements. To begin, the adoption must involve an eligible kid, which is defined as any child under the age of 18 or a youngster who is physically or mentally unable to care for themselves. The credit is accessible for both domestic and overseas adoptions, although the timing and qualifying criteria differ between them.
For domestic adoptions, the credit can be claimed for qualified expenses paid before the adoption is final. In contrast, for foreign adoptions, the credit can only be claimed in the year the adoption becomes final.
- Maximum Credit Amount and Phase-Out - The maximum adoption credit for tax year 2024 is set at $16,810 per kid. This sum may be adjusted for inflation in future years. It is vital to understand that the credit is non-refundable, which means it can only decrease your tax burden to zero and does not result in a refund.
The credit and employer reimbursement exclusion (described below) begin to phase out in 2024 for taxpayers with modified adjusted gross income (MAGI) more than $252,150, and are totally eliminated for taxpayers with MAGI greater than $292,150. These numbers are modified annually for inflation. While the majority of phaseout criteria and limitations connected with tax benefits differ by filing status, the adoption credit and employer-provided adoption benefits apply to all filing situations equally.
- Interaction with the Alternative Minimum Tax (AMT) - The AMT was intended to charge high-income people who had previously paid little or no tax under the traditional tax system. Unlike some other tax credits, the adoption credit can be used to reduce both your ordinary tax payment and the AMT. This increases the credit's value for people subject to AMT, as it can give considerable tax relief.
- Unused Credit Carryover - If the adoption credit permissible for the tax year exceeds the taxpayer's tax due for that year, the excess credit can be carried over to the following tax year and applied to the adoption credit allowable for that year, if applicable. Carryover is not permitted for the portion of the credit lost due to the AGI phaseout.
The adoption credit cannot be carried forward to any tax year beyond the fifth tax year after the tax year in which it occurred.
Credits carried over from a previous tax year are not subject to the income phaseout regulations in subsequent tax years. However, a carryforward amount is still subject to the credit's monetary ceiling in the carryforward year, as well as the constraint that the credit received cannot exceed the taxpayer's tax due for the year.
- Employer-Reimbursed Expenses - Some workplaces provide adoption aid as a fringe perk. The credit limit is equal to the amount of employer adoption aid that can be deducted from an employee's gross income for child adoption purposes. The excludable amount is phased away in the same way as the credit. A taxpayer cannot claim a credit for any employer-reimbursed adoption expenses.
- Failed Adoption of a U.S. Child - The credit covers qualified adoption expenditures paid or incurred in a failed effort to adopt one eligible U.S. child prior to successfully finalizing the adoption of another eligible kid. The unsuccessful/successful adoptions are regarded as a single attempt for each eligible kid for the purposes of the credit's monetary limit. Even costs incurred in connection with a failed effort to adopt a child from the United States that results in no subsequent successful adoption are eligible.
- Adoptive Child ID Number - The taxpayer must enter (if known) the child's name, age, and taxpayer identification number (TIN) on the return. 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 for an ITIN) to fulfill filing requirements.
Adopting a child is a great and compassionate deed, but it can provide considerable financial hurdles. The adoption credit is a crucial resource for adoptive parents, making adoption more affordable for many families.
If you have any concerns regarding how this credit or income exclusion may apply to your situation, please contact our office.
