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.

  1. Qualified Adoption Expenses - QAE

    Qualified adoption expenses are the necessary costs paid to adopt ...
  2. Dependent

    A dependent is a person who entitles a taxpayer to claim dependent-related ...
  3. Non-Refundable Tax Credit

    A non-refundable tax credit is a tax credit that can only reduce ...
  4. Tax Credit

    An amount of money that taxpayers are permitted to subtract dollar ...
  5. Relationship Test

    The Relationship Test is test one must pass in order to be claimed ...
  6. Alternative Motor Vehicle Credit

    The alternative motor vehicle credit is a tax credit for buying ...
Related Articles
  1. Personal Finance

    How To Claim A Dependent On Your Tax Return

    If you are a caregiver, get to know the rules for claiming a dependent before filing your taxes.
  2. Personal Finance

    Tax Credits For Families

    Sometimes it actually pays to have kids if you are looking for significant tax breaks.
  3. Personal Finance

    New Baby, New Tax Break

    Delivering a new baby also delivers a $1,000 child tax credit - and that's just the start!
  4. Personal Finance

    Are You Taking Advantage of the College Tuition Tax Credit?

    Parents with a child enrolled in college should check out the college tuition tax credit, a boon that can help defray the cost of a university education.
  5. Taxes

    20 Tax Changes You Need To Know About

    Don't miss out on the tax changes. Here's a list that you need to know about.
  6. Personal Finance

    Credit Cards For Kids

    Giving your child a credit card can be an important lesson in money management.
  7. Taxes

    This Explains $0 Federal Income Tax for Millions

    Understand how the earned income tax credit works and whether it applies to you.
  8. Taxes

    How To Get The Most Money Back On Your Tax Return

    These tips will help you get a larger refund this year, while teaching you how to pay less taxes going forward.
  9. Personal Finance

    Taxing Times For Divorced Parents

    Find out how to deal with the tax issues that arise for divorced parents with dependent children.
Hot Definitions
  1. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  2. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  3. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  4. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  5. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
  6. Balance Sheet

    A balance sheet reports a company's assets, liabilities and shareholders' equity at a specific point in time.
Trading Center