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Claim Your Adoption Tax Credit

Understanding and navigating through various tax rules, regulations and guidelines can be extremely challenging. Identifying the specific credits that you may be entitled to during the year can be even more difficult. For example, If you are an adoptive parent, there is a specific tax credit that will apply to you and your particular situation. Each year, this credit and its structure can change. However, there is an adoption credit of up to $14,300 for qualified expenses that were paid out of pocket for last year. 

Who Qualifies?

Overall, this adoption credit is available for the majority of adoptive parents. Eligible children are those who are 17 years old or younger or of any age if they are mentally or physically unable to care for themselves. Additionally, the child must be a U.S. citizen or resident alien.

There are a few exceptions though. These include, but are not limited to, the adoption of stepchildren and families whose income exceeds a specified amount. It is also important to remember that the maximum credit has been indexed for inflation.

This tax credit is available for every child who is adopted, no matter the specific circumstances. In other words, it will apply to international adoptions, private domestic adoptions as well as those completed through public foster care. The actual distribution of the credit reaches across varied income groups. Low or moderate income families may get a more minimal amount due to their smaller tax liability. 

While the adoption credit is nonrefundable, it can be carried over for a maximum of five years. So, even those who do not have a federal tax liability to benefit from this year, should still file for the credit. Since it can be carried over, it may be beneficial in the future if it becomes refundable again at some point. 

Special Needs Adoption

One of the most significant pieces of the tax credit breakdown is the “special needs” provision. Adoptions that involve a child with special needs automatically qualify for the maximum credit. This is regardless of the total out of pockets expenses that were incurred during the year. The qualification is defined by the tax code as an adoption that involves a child that should not or can not be safely returned to their biological parents and that would not be deemed adoptable without assistance to the adoptive mom or dad. 

In most situations, a child who receives adoption assistance benefits or other subsidies will be considered special needs. This part of the tax credit helps encourage individuals to adopt potentially hard to place children, by helping to ease some of the financial burden. 

Fortunately, the need for such a credit has been recognized in the tax world for several years. It has continually increased since 1997. Originally, the maximum value was only $5,000. As years passed, it was evident that the expenses associated with adoptions can be quite staggering and that parents needed additional help. This resulted in the maximum credit that we see for 2020 at $14,300.