Choosing to adopt a child is a rewarding and an amazing life changing event for both the child and the family. Unfortunately, the time and money invested in the adoption process can often be significant. Adoptive parents can spend years and invest over $30,000 into the process of adoption. To help alleviate some of the costs associated with an adoption, the Internal Revenue Service (IRS) offers two tax benefits that help families with the cost of adoption 1) a nonrefundable tax credit; and 2) an income exemption for those adoptive parents who are offered adoption assistance through their employers.
Adoption Tax Credit:
In 2017, the IRS allows a $13,570 per child, dollar for dollar tax credit toward your income taxes for qualified adoption expenses you paid to adopt a child. To illustrate, if you have $13,570 in qualified expenses and a tax liability of $15,000, you can utilize the full $13,570 credit which reduces your tax liability to $1,430. If the credit exceeds your tax liability, you can roll forward the remaining credit for use toward offsetting your income taxes in the next year, for up to five years, until it is used.
If the adoption is from a foreign country, then the process must be finalized before you can claim the credit. If the adoption is not finalized, you are not eligible for this benefit. Expenses paid for a domestic adoption will be claimed in the year following that in which the expense was paid, if the adoption has not yet been finalized. In the year that the adoption is finalized you will be able to claim that year’s expenses plus those for the previous year. Even if the expenses are spread out over a few years, the maximum amount of $13,570 per child for the credit still applies.
Employer Provided Assistance:
If your employer provides assistance for adoptions, you may exclude what your employer reimburses to you, up to $13,570 from your gross income. If your employer offers adoption assistance, you first need to take the exclusion from your income before you can apply any additional qualified expenses toward the tax credit. Any money that applies toward the exclusion cannot also be applied toward the tax credit and vice versa—no double dipping!
For example, if you have $27,140 in qualified expenses and your employer reimburses you for $13,570—the maximum amount you can take as an exclusion from your income—you can apply the remaining $13,570 of qualified expenses toward the tax credit. In another example, if your qualified expenses total $10,000 and your employer provides a $5,000 reimbursement, then you will only be able to apply $5,000 toward the Adoption Tax Credit since expenses claimed for the exclusion cannot also be claimed for the tax credit.
As with the other credits that we have mentioned in this New Parent Series, there are some requirements that you have to meet to be eligible. The adoption must be of an eligible child meaning that they are under the age of 18 unless he/she is physically or emotionally unable to care for themselves. The child cannot be of the taxpayer’s spouse unless you live in a state in which a same-sex second parent or a co-parent can adopt their partner’s child. Qualified expenses approved by the IRS include adoption fees, court costs, attorney fees, and travel expenses. There may be other expenses directly related to an adoption that can be included as well.
Additionally, this credit and exclusion takes into consideration your modified adjusted gross income (MAGI) and phases out for taxpayers with a MAGI over $203,540.
As always, we recommend that you keep accurate and organized records of expenses that you will claim on your taxes but especially so when claiming this exemption and credit due to the high dollar amount. If you wish to learn more about this topic, additional information can be found in IRS Topic 607 – Adoption Credit and Adoption Assistance Programs, or check with your tax professional.
The next part in the series will discuss the importance of estate planning as a parent. In the meantime, if you have any questions regarding your personal taxes and how to report information relating to the Adoption Credit and adoption assistance, please feel free to contact Glick and Trostin, LLC at 312-346-8258.
To read the other posts in the New Parent Series, simply follow these links:
New Parent Series Part V - Creating an Estate Pan
To read the other posts in the New Parent Series, simply follow these links:
New Parent Series Part V - Creating an Estate Pan
Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein. No one should rely upon the information contained herein as constituting legal advice. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.
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