How Does the Adoption Tax Credit Work?


Adoption Tax Credit

  • The adoption tax credit passed by Congress and signed into law by President Clinton in 1996 is one of the more complicated tax laws related to middle-income families. Generally speaking, it provides a tax credit to families who made out-of-pocket expenses related to the adoption of a child other than that of a spouse. Unlike a tax deduction, which reduces the total taxable income, a tax credit is an after-tax reduction in the overall tax liability. The adoption tax credit provides a variable amount of money, $13,360 in 2011, and allows employers to provide adoption-specific benefits free from federal income tax.

Qualifications and Limitations

  • Only qualified adoption expenses are eligible for reimbursement through the tax credit. These include reasonable adoption fees, court costs, attorney's fees, traveling expenses and most other expenses related to the legal adoption of an eligible child by the taxpayer. Eligible children are those age 17 or younger, or a child of any age who is a US citizen or resident alien and who is physically or mentally incapable of caring for himself or herself. Adoption of a spouse's child is not covered by the adoption tax credit.

    Obtaining the adoption tax credit requires the filing of Form 8839 with the IRS. Additional forms will be necessary if the child does not have a Social Security Number. The amount of credit the adopting family qualifies to receive is limited to actual qualified expenses they can demonstrate. If adoption related expenses do not exhaust the full amount in a single year, the remainder can be claimed in future years. However, the upper limit of the credit is based per child, not per year. The credit is also limited by the family's adjusted gross income. After certain exemptions such as business or investment losses and contributions to pension plans, families whose annual income exceeds $225,210 are not eligible for the adoption tax credit. Families whose income is between $185,210 and $225,210 are eligible for a smaller tax credit.

Employer Benefits

  • Some employers offer adoption benefits, subject to the same restriction applicable to the family's out-of-pocket expenses. When filing for the tax credit, expenses can only be listed once, either as an expenditure of the family or a benefit received from an employer. Income received as an employee benefit, however, is still subject to Social Security tax, Medicare tax and state income tax. Families seeking the adoption tax credit should consult a tax professional to ensure they receive the full benefits under the law.

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