What is an Adoption Credit

An adoption credit is a federal tax credit that may be claimed by federal taxpayers who incur qualifying expenses to adopt an eligible child. Qualifying expenses include adoption fees, court costs, attorney fees and travel expenses. To be eligible, a child must be under 18 or physically or mentally incapable of self-care.

Some costs that are paid before an eligible child has been identified and adopted may still qualify as adoption expenses. For example, prospective adoptive parents who pay for a crib before they identify a child to adopt can include the cost as a qualified adoption expense.

Breaking Down Adoption Credit

The adoption credit has been refundable in some years, meaning that it could be claimed even if the credit exceeded the taxpayer's tax liability, in which case the taxpayer is due a refund. In other years, the adoption credit has been nonrefundable, meaning that it could be deducted from the taxpayer's tax liability only until the liability equals $0.

To claim the adoption credit, taxpayers must submit adoption documents and form 8839, Qualified Adoption Expenses, along with their federal tax return. Form 8839 allows taxpayers to calculate the amount of the credit. It also asks for the child's first and last name and birth year, as well as whether the child has special needs, is foreign born or is disabled.

The maximum amount of the adoption credit for 2017 is $13,670 per child. As of 2017, the adoption credit was nonrefundable. However, taxpayers can carry forward any excess of their tax liability for up to five years, mitigating the potential negative impact of the credit for low-income taxpayers. If the taxpayer's employer also provides adoption assistance payments, these will reduce the amount of the credit.

In 2017, the credit begins to phase out for families with incomes of $203,540, and phases out entirely at incomes of $243,540. Families with upper-middle incomes tend to benefit the most from the adoption credit as it is currently modeled. Lower-income families are hampered by the credit's non-refundability, while the highest-income families do not have access to the credit.

The Adoption Credit and Special Needs Children

Special needs adoptions automatically qualify for the maximum amount of the adoption credit, no matter the adoptive parents' expenses. For the purposes of the credit, children are defined as having special needs if a state's welfare agency rules that they cannot or should not be returned to their parents' home, and that the adoptive family requires assistance to adopt them. This provision exists to encourage parents to adopt hard-to-place children.