Adoption and Taxes
I have a special respect and admiration for those who, through adoption, open their hearts and homes (and finances) to children needing forever families. It’s a special and divinely inspired calling, to be sure.
It’s also one that public policy supports through the tax code, both at the federal and state levels. There are, of course, tax benefits that are common to all parents of dependent children, as well as special tax incentives for adoptions. Let’s look at both.
First, let’s look at tax provisions that apply to parents of both biological and “gotcha” children (I just love that concept of “gotcha” for adoptions – there’s something incredibly special about celebrating “Gotcha Day”, but I digress).
One such benefit is the Child Tax Credit (CTC). If you have a kid under the age of 17 who qualifies as your dependent under the tax code, you are eligible for the CTC. At least through tax year 2025, the maximum CTC is $2,000 per qualifying child. You qualify for the full amount of the CTC if your annual income doesn’t exceed $200,000 (or $400,000 if filing a joint return). At income levels above that, the CTC will be reduced $50 for every $1,000 of increased income, and ultimately could be zero.
If you qualify for the CTC but can’t take advantage of it fully because your tax liability isn’t high enough (or is zero), you still may be able to get part of the credit refunded to you by using what is know as the Additional Child Tax Credit (ACTC). There are a few more rules for using the ACTC beyond the scope of this article, but it could result in money coming back to you than you paid to the IRS in the first place.
A few things to note about the above credits. Both are claimed by filing Form 8812 with your tax return. Also, after 2025, the maximum CTC is currently scheduled to go down to $1,000 per child unless action is taken by Congress. We are in the middle of an election year, and both major party candidates are proposing increases to the CTC, so chances are pretty good it will be changed or at least not allowed to sunset.
Adoptive parents, of course, can take advantage of the aforementioned credits too. Additionally, there are a couple of other tax breaks that are available to those who have adopted children.
Probably the most common one is the adoption credit (AC). This credit is available to parents who adopted or started the adoption process during the tax year, and can be used for international, domestic, private and public foster care adoption cases. For 2024 returns, the maximum AC is capped at $16,810 of qualified adoption expenses for adopting children under age 18.
Qualified expenses include adoption fees, court costs and legal fees, adoption related travel and lodging, and other expenses directly related to the adoption. It does NOT apply to the adoption of a spouse’s child, however.
Much like the limits on the CTC and ACTC discussed above, there are income limits related to the AC as well. For 2024, the credit starts to phase out for taxpayers with modified adjusted gross incomes (MAGI) above $214,520 and is fully phased out for those with MAGI exceeding $254,520.
Closely related to the AC is an income exclusion for employer-provided adoption assistance. The rules for the exclusion are essentially the same as for the AC, i.e., what expenses qualify, who is an eligible child, income limits, etc. The difference is that with the exclusion, instead of getting a credit on your income tax return, benefits received through the employer’s plan are never counted as taxable income to begin with.
Some important aspects to understand. For domestic adoptions, qualifying expenses paid before the year an adoption is finalized are allowable for the tax year following the year of payment regardless of whether the adoption is ever finalized or an eligible child is even ever identified.
The rules are slightly different for foreign adoptions. In foreign cases, qualifying expenses paid before the year of the adoption are allowable only for the year when the adoption is finalized.
For both types of adoptions, money expended during or subsequent to the year the adoption is finalized is allowable for the year of payment.
To sweeten the deal a bit, Arkansas also gets into the act, allowing a state income tax credit equal to 20% of the amount allowed on the federal return.
