Adoption Tax Credit: Right for You?

Adopting a child can be both complicated and expensive, costing upwards of $40,000. However, with the help of the government, you can obtain an adoption tax credit that was worth $14,400 in 2021.

This year, the adoption tax credit is now $14,890. The adoption tax credit comes with many different rules and limitations, which you should study prior to claiming the tax credit.

• There are various income limits that could potentially affect the dollar value of the adoption tax credit that you obtain. For instance, if you earn a modified adjusted gross income of $216,660 or less per year, you can claim the credit in full. However, if your income is somewhere within the $216,660 to $256,660 range, you are permitted to claim a portion of the credit. Alternatively, people who earn incomes that exceed $256,660 are not eligible to claim the adoption tax credit. These implications only apply for the year 2021, so double-check the income-related limitations for the relevant year, as they tend to change on an annual basis.
• Another requirement pertaining to eligibility for the adoption tax credit is that the children must be 18 years old or younger, the latter of which is applicable if the child is physically unable to care for himself or herself.
• The adoption tax credit cannot be refunded, which means the dollar value of the credit is limited to the taxes you file for the year 2021. Any credit remaining from the tax you owe for money earned in 2021 may then be carried over for up to five years. So, even if you are not in a position where you do not have any federal income tax liability, the option to carry the adoption tax credit forward should be available to you.
• Qualified expenses include the following:
  • Fees associated with adoption
  • Costs of court-related matters
  • Legal and attorney fees
  • Travel expenses related to adoptions
  • Other expenses directly associated with adopting a child
• In certain situations, people who fall into the category of registered domestic partners might pay all of the adoption fees. As long as the state in which the registered domestic partner resides allows for same-sex parents or co-parents to legally adopt their partner’s child, then the adoption fees can be considered as qualified expenses. However, according to the IRS, taxpayers who adopt the children of their spouses are not able to claim the child adoption tax credit.
• Certain expenses can be counted toward the tax credit, even if the adopted child has neither been brought home yet nor legally adopted. For instance, the fees associated with space that will be used someday in the future can still be claimed and applied to the list of adoption expenses.
• What if you go through the entire adoption process and you incur a lot of expenses along the way but the adoption ultimately falls through at the last second? In that instance, the IRS will often still view people as being eligible for the credit. However, it can only be applied toward U.S. adoptions, not foreign adoptions.

Be sure to apply for an ATIN

If you do not have a Social Security number for the adopted child nor are you able to obtain one, consider applying for an adoption taxpayer identification number (ATIN) directly through the IRS. It will suffice as a temporary ID that the child can be identified with via the federal tax return, making it possible to identify him or her as you await the finalization of the domestic adoption.

If the adoption is between countries, the child being adopted will have either a resident alien card or a certification of citizenship. Use Form W-7A, which is also called the Application for Taxpayer Identification Number for Pending Adoptions. You can learn more about ATINs, including the ways you can use them, as well as how you can eventually replace ATINs with an official Social Security number.

Adoption can be an emotionally draining and mentally exhausting process as it involves quite a lot of details. Plus, you’ll find yourself filling out paperwork and documents galore. but doing so is certainly worth the energy and the effort that it takes. Be sure to talk with a tax adviser to better understand the adoption tax credit and how to gain access to the tax credits you’re entitled to based on your situation.