Tax Tip – Adoption Tax Credit

An adoption tax credit is a tax credit offered to adoptive parents to encourage adoption. Section 36C of the United States Internal Revenue code offers a credit for “qualified adoption expenses” paid or incurred by individual taxpayers.

The tax code provides an adoption credit of up to $13,570 of qualified expenses (in 2017) for each child adopted, whether via public foster care, domestic private adoption, or international adoption.

As the Tax Policy Center notes: 

The adoption credit is available to most adoptive parents, with some exceptions. The credit is not available to taxpayers whose income exceeds certain thresholds. In 2017 the credit begins to phase out at $203,540 of modified adjusted gross income and phases out entirely at income of $243,540. The credit also is not available for adoptions of stepchildren. The adoption tax credit is nonrefundable but can be carried forward for up to five years. The credit is thus of little or no value to low-income families who pay little or no income tax over a period of years. In fiscal year 2015, credit claims reduced tax liability by $300 million, according to the US Department of Treasury.

2017 Adoption Tax Credit-None Special Needs Adoption

As this report observes, the amount allowed in 2017 for the Adoption Tax Credit for non special-needs adoptions, both domestic and international, is $13,570 for “qualified adoption expenses.” The definition of what IRS considers a qualified adoption expense has not changed, and families must be able to document these expenses, if requested by the IRS. This amount is up slightly from 2016 ($13,460).

2017 Adoption Tax Credit-Special Needs Adoption

Families who adopt a child with special needs from US foster care are eligible to claim the Federal Adoption Tax Credit in 2017 of $13,570 whether or not they actually incurred any adoption expenses. A child is considered to have “special needs” if they receive an adoption assistance/subsidy benefits from the state. Children adopted internationally, even if they have diagnosed special needs, are not considered as a “special needs adoption” by the IRS and parents can only claim the credit for qualified adoption expenses.

Will the Adoption Tax Credit Be Refundable In 2017?

The Adoption Tax Credit for taxes filed in 2017 is not refundable. A refundable tax credit is one you get back regardless of what you owe or paid in taxes for the year. When the credit is not refundable, you receive only what you have in federal income tax liability.

Will Trump’s Tax Plan Repeal the Adoption Credit?

For thousands of families who are going through the process of adoption or who have recently finalized an adoption, Trump’s tax plan would have serious implications. Unfortunately, there’s a real chance it could go away. Because the Adoption Tax Credit is not a deduction, it’s not currently clear whether the adoption tax credit will get the axe under Trump’s plan. 

In order to take advantage of the Adoption Tax Credit, we strongly recommend that you consult with a tax professional to determine the extent of the tax credit available to you.