Adoption Tax Credits

April – ah, the joy of finally having spring flowers, a touch of snow, and temperature swings so wild you think you are on a grand roller coaster. The joys of living in North Carolina!

Ah, but the one big drawback of April it seems – the dreaded TAX DAY! However, it seems like the ideal time to discuss one of the few times for individuals that your legal fees might actually afford a substantial tax credit – not just a deduction – adoption!

The IRS has a tax credit for adoption, and according to official IRS Publication 17, in 2018 that credit was $13,810, as long as your modified adjusted gross income was less than $207,140 (at which point the credit starts to get phased out, and if you make $247,140 or more, you cannot take the credit). Note – this is PER child – so if you adopted 2 kids, it would be $27,620! In 2019, it appears as though the credit is being raised to $14,080 per child.

Common questions and answers:

• What expenses can I deduct? Just my lawyer’s fees? No – you can deduct:

1. Reasonable and necessary adoption fees (i.e. home study fees)
2. Court costs
3. Traveling Expenses (including hotel/food)
4. Other expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child

• Do I have to know who the child is before the expense counts?

  No! For example, you might pay for the home study before you know who the child is, to make sure you will qualify and be approved. That still counts as a qualified adoption expense.

• Well, what does NOT count?

  The one major exception is expenses related to adopt your husband or wife’s child (i.e. the “step parent adoption”). Also, if your employer provides help, you may deduct the credit from your income (i.e., it doesn’t count as taxable income), but you cannot count deduct your employer’s contribution to your adoption expenses AND count the contributed expenses as your own, too. So if the adoption costs $5,000, and your employer paid $2,500, then you can only deduct $2,500 (your out of pocket expenses), but you will not have to pay income taxes on the $2,500 your employer gave you to help, either. Surrogacy expenses don’t count, either.

• What if the adoption crosses tax years?

  For example, what if we get the home study in December 2018, then we pay the lawyer, etc. in February 2019 after the Home Study is complete, and then finalize the adoption later in 2019. That’s still ok! You can claim the adoption expenses that happened the year before the adoption becomes final on the NEXT tax year (in this case, claim the 2018 expenses in 2019), and then because the adoption was finalized in 2019, you can either claim the rest in 2019 and/or 2020 (if there was leftover credit).

• What about the credit? Will I get a bigger refund?

  Not necessarily –  it’s a credit, so it can reduce your tax liability, but as a credit, the IRS specifically states: “The credit is nonrefundable. This means the credit may only reduce a taxpayer’s tax liability to zero. If the credit is more than the tax owed, the taxpayer can’t receive an additional amount as a refund.”

• So if I can’t use the credit because I got a refund, do I lose it?

  NO! You can carry forward any unused credit to the next year for up to 5 years (or until you use it all up, whichever happens first).

• What if I adopt a special needs child?

Then you may be able to take the credit even if you didn’t pay ANY qualified adoption expenses. Definitely talk with your tax preparer about this!

• Adoptions of kids from the United States versus from another country?

  The rules cited in this article are focused on adoptions of kids in the United States. There are special tax rules for foreign adoptions, and you will most certainly want to talk to a qualified tax preparer about this situation.

• I’d love more information to research or to share with my tax preparer – where can I read more?

  Here’s some IRS resources for your reading pleasure (ha!):

  1. Nine Facts About the Adoption Credit
  2. Topic Number 607 – Adoption Credit and Adoption Assistance Programs
  3. Form 8839, Qualified Adoption Expenses
  4. Interactive Tax Assistant: Adoption Credit

If you adopted a child in 2018 – either through Apple Payne Law, or through another law firm/agency/etc., be sure to let your tax preparer know, and if you‘ve already filed, you may need to file an amended return.

If you are thinking about a private adoption – maybe a friend or family member is seeking to put their child up for adoption, or you’d like to learn more about the process, costs and such, call and schedule a consultation with a adoption attorney at Apple Payne Law – we would love to help you! And hey, even if you don’t adopt yet, the consultation and fees paid to us are still a tax credit for the next tax year.