Adopting a child is a life-changing decision that comes with emotional, legal, and financial responsibilities. To help offset the often significant costs associated with adoption, the U.S. government offers the Adoption Tax Credit, a valuable benefit that can result in a substantial refund for qualifying families. This credit is designed to ease the financial burden of adoption and encourage more families to open their homes to children in need.
This blog provides an in-depth look at the Adoption Tax Credit, including eligibility, covered expenses, limits, income thresholds, and how to claim it properly. Understanding this credit can significantly reduce your federal tax liability—or even lead to a larger tax refund.
1. What Is the Adoption Tax Credit?
The Adoption Tax Credit is a nonrefundable federal income tax credit that allows adoptive parents to claim certain qualified adoption expenses they paid to adopt an eligible child. A nonrefundable credit means it can reduce your tax liability to zero, but any excess amount beyond that will not be refunded to you. However, unused portions can be carried forward to future years for up to five years.
The purpose of this credit is to alleviate the high costs of adoption and support families who are choosing to adopt, particularly from the foster care system or internationally.
2. How Much Is the Adoption Tax Credit Worth?
For the tax year 2024, the maximum Adoption Tax Credit is $16,810 per child. This amount is adjusted annually for inflation. The credit applies per child, so if you’re adopting siblings or multiple children at once, the potential refund can be even larger.
Remember, the credit is only available for qualifying expenses and may be reduced based on income limits (explained below).
3. What Are Qualified Adoption Expenses?
To claim the credit, expenses must be directly related to the legal adoption process. Qualified adoption expenses include:
- Adoption fees
- Attorney and court costs
- Travel expenses (including meals and lodging)
- Home study and agency fees
- Expenses related to post-placement supervision
- Re-adoption expenses for foreign adoptions
Expenses that are not qualified include costs paid using government funds, costs incurred in a surrogate parenting arrangement, and expenses to adopt a spouse’s child (i.e., stepparent adoption).
4. Who Qualifies for the Adoption Tax Credit?
To qualify, you must:
- Have paid qualified adoption expenses for a child under 18 (or a person physically or mentally incapable of self-care)
- Be a U.S. taxpayer with modified adjusted gross income (MAGI) below the phase-out limit
- Have completed or attempted to complete an adoption (with special rules for failed adoptions and special needs adoptions)
The child being adopted can be either a U.S. citizen or a foreign national. However, the timing of when you can claim the credit varies based on the adoption’s progress and whether the child is a U.S. citizen.
5. What Are the Income Limits?
The Adoption Tax Credit begins to phase out for taxpayers with a MAGI above a certain threshold. For 2024:
- The credit begins to phase out at $239,230
- The credit is completely phased out at $279,230
If your MAGI falls within this range, your available credit will be reduced on a sliding scale. If it’s above the upper limit, you won’t be eligible for the credit at all.
6. Special Rules for Special Needs Adoptions
Adopting a child with special needs offers unique benefits under the Adoption Tax Credit. In the case of a qualified adoption of a child determined to have special needs (usually through foster care), you may claim the full amount of the credit even if you didn’t incur any actual expenses.
The IRS considers a child to have special needs if:
- The child is a U.S. citizen or resident
- A state has determined the child cannot or should not be returned to their parent’s home
- The child likely won’t be adopted unless assistance is provided
This provision can result in a significant tax savings for adoptive parents of children from the foster system.
7. Timing Rules: When to Claim the Credit
The year you can claim the Adoption Tax Credit depends on whether the adoption is domestic or foreign:
- Domestic Adoption: You can claim expenses in the year after they are paid, even if the adoption is not finalized.
- Foreign Adoption: You can claim expenses only in the year the adoption becomes final.
If the adoption fails or is not completed, you may still be eligible to claim the credit in certain cases—especially with domestic adoptions. However, foreign adoption expenses cannot be claimed if the adoption is never finalized.
8. How to Claim the Adoption Tax Credit
To claim the credit, you must file a paper tax return (if required documentation cannot be e-filed) and include:
- Form 8839 – Qualified Adoption Expenses: This form is used to calculate and claim the credit
- Names, Social Security Numbers, and birth dates of the adopted children
- Proof of qualified adoption expenses (receipts, invoices, etc.)
- Documentation of the child’s special needs status (if applicable)
Form 8839 is attached to your federal Form 1040. Ensure you keep all related records in case of IRS inquiries or audits.
9. Carryforward of Unused Credit
Because the Adoption Tax Credit is nonrefundable, any amount that exceeds your tax liability cannot be claimed as a refund in the same year. However, the IRS allows you to carry forward any unused credit for up to five subsequent tax years.
This means that even if you can’t claim the entire credit in the first year, you can continue to reduce your future tax liabilities until the full credit is used up or the five-year period ends—whichever comes first.
10. Examples of Potential Refunds
Here are some example scenarios to show how the Adoption Tax Credit can impact your tax situation:
Example 1 – Standard Domestic Adoption
John and Maria adopted a child in 2024 and incurred $14,000 in qualified adoption expenses. Their MAGI is $150,000. They owe $8,000 in taxes for the year. They can claim $14,000 in Adoption Tax Credit, which reduces their tax bill to $0 and allows them to carry forward the remaining $6,000 for future years.
Example 2 – Special Needs Adoption
Lisa adopted a child from foster care who was determined to have special needs. Even though she only paid $2,500 in actual expenses, she qualifies for the full $16,810 credit. She uses $6,000 to reduce her current year’s tax liability and carries forward the remaining $10,810.
Example 3 – High-Income Phase-Out
Steve and Karen have a MAGI of $270,000 and paid $20,000 in adoption costs. Because of the income limit phase-out, they are eligible for only a partial credit—approximately $3,000—depending on their exact MAGI within the range.
11. Impact on Refunds and Financial Planning
While the Adoption Tax Credit is not refundable, it significantly reduces your tax bill and can increase your refund if you have other refundable credits such as the Child Tax Credit or the Earned Income Tax Credit (EITC). Additionally, planning your adoption timing and expenses carefully can help you maximize your available credit over several years.
Financial advisors often recommend strategic adoption planning to align expenses with years where income is lower or other deductions apply, allowing families to benefit more fully from this generous credit.
12. When to Seek Professional Help
You should consider working with a tax advisor if:
- You’re adopting multiple children or siblings
- Your income is close to or within the phase-out range
- You adopted a child with special needs
- You have foreign adoption expenses or failed adoptions
- You want to coordinate the credit with other deductions or credits
A qualified tax professional can ensure you maximize your available credit and meet all IRS documentation requirements.
Conclusion
The Adoption Tax Credit offers a powerful financial incentive for families considering adoption, helping offset the high costs and potentially providing thousands of dollars in tax savings. Whether you’re adopting domestically, internationally, or through the foster system, understanding this credit can make a meaningful difference in your financial journey as a new parent.
With proper planning, documentation, and IRS-compliant filing, new parents can unlock significant refund opportunities and focus more on the joy of welcoming a new child into their home.
