Discover Lifelong Benefits: How the Adoption Tax Credit Can Change Your Family's Story
Adopting a child can be a challenging process, both emotionally and financially. To ease the financial burden, the U.S. federal government offers an adoption tax credit, providing substantial relief for adoptive families. This comprehensive guide delves into the specifics of the federal adoption credit, covering qualifications, eligible children, the credit amount, phase-out provisions, special needs children, qualified expenses, substantiation requirements, employer reimbursement exclusion, and more.
What is the Federal Adoption Credit? - The federal adoption credit is a non-refundable tax credit available to taxpayers who incur expenses related to adopting a child. This credit helps mitigate the substantial costs associated with adoption, such as legal fees, travel expenses, and more. However, being a non-refundable credit means it will only offset the tax liability but will not result in a payment from the IRS if the individual’s tax liability is zero.
Qualifications for the Credit -To qualify for the federal adoption credit, prospective parent must have incurred qualified adoption expenses while adopting an eligible child.
Who is an Eligible Child? An eligible child, for the purpose of this credit, must be under 18 years old or physically or mentally incapable of self-care at any age. The child cannot be:
A spouse’s child, or
The result of a surrogacy.
“Special needs” adoptions qualify without requiring expense substantiation, acknowledging the inherent complexities and challenges related to these adoptions.
Credit Amount and Phase-Out Provisions - For 2025, the maximum adoption credit is $17,280 up from $16,810 in 2024. The credit begins to phase out at a Modified Adjusted Gross Income (MAGI) of $259,190 and is completely phased out at $299,190. These thresholds are subject to annual adjustments for inflation, and unlike most tax-related phaseouts, are the same across all filing statuses.
The MAGI is the AGI with some items added back in (specifically, excluded income from Puerto Rico or American Samoa, and excluded foreign earned income and foreign housing allowance).
Some families are told incorrectly that they are going to get a big check for the credit amount, and that’s usually not the case.
Families with adjusted gross incomes (MAGIs) of about $250,000 (just below the phaseout) are more likely to obtain the best benefit from the credit, whereas a family with an AGI of $30,000 won’t have any tax liability and therefore won’t benefit from the credit. The credit is nonrefundable, so once a taxpayer’s liability hits zero the credit will not apply, but see below for carryover to another year.
Some states have their own adoption tax credits as well.
Considerations for Special Needs Children - Special needs adoptions allow for the maximum credit amount whether or not the adopting parent has adoption-related expenses. The IRS defines a child with special needs as one who cannot or should not return to their birth parents' home and is unlikely to be adopted without assistance.
Qualified Adoption Expenses - Qualified expenses include reasonable and necessary costs including:
Adoption fees,
Court costs,
Attorney fees, and
Related travel expenses.
Foreign Adoptions - For foreign adoptions, the credit is only available in the tax year the adoption becomes final. If the adoption does not become final, no credit is available. Additional safe harbors exist to determine when foreign adoptions are final, mitigating IRS challenges.
Substantiation and Documentation - Taxpayers do not need to submit substantiating documentation with their return but should retain it for potential future IRS inquiries. Essential documents include adoption decrees, placement agreements, and home study reports.
Employer Reimbursement Exclusion Amount - Employers may offer adoption assistance programs, which can reduce the employee’s taxable income up to the amount of the adoption credit limit, which for 2025 is $17,280. However, the excluded reimbursement must not be double-claimed through the credit.
Adoptive Child’s ID Number - When filing for the adoption credit, the child's Taxpayer Identification Number (TIN) must be included on the new parent’s return. Usually, this is the child’s Social Security Number (SSN). However, prospective adoptive parents who have had a child placed in their household by an "authorized placement agency" and meet certain other requirements may apply for a temporary (two-year) adoption taxpayer identification number (ATIN) for the child, unless the child is an alien eligible to get an ITIN, to satisfy filing requirements. But a child must have a SSN to qualify the parent for the earned income credit or child tax credit, not an ITIN or ATIN.
Credit Carryover - If the credit exceeds the taxpayer’s tax liability, a carryover of the unused credit is permitted for up to five years, ensuring adoptive parents can fully benefit from the credit.
Cost of Adopting and Ways to Pay It - Adoption, beyond tax credits, can be a hefty financial endeavor. The cost to adopt varies significantly based on the adoption process selected.
Understanding Adoption Costs Foster Care Adoption - Generally the least expensive, averaging under $2,800.
Independent Adoption - Costs between $20,000 and $45,000 due to additional fees for home study and the birth mother’s medical bills. The adopting parent(s) cannot claim a tax deduction for the birth mother’s medical expenses, nor use those expenses as part of the costs for the adoption credit.
International Adoption - Ranges from $35,000 to $70,000 depending on the country, with added travel and accommodation expenses.
Financing Adoption - For many families, these costs can be beyond reach, leading to the necessity of exploring financing options:
Loans: Home equity loans offer favorable terms. However, the interest paid on home equity loans is not tax deductible.
Adoption Grants: These do not need repayment and are often awarded on a first-come, first-served basis. Search the internet for “adoption grants” to find participating organizations.
State Subsidies – Adopting parents may qualify for a state subsidy. Learn more about each state’s assistance program by visiting the Families Rising website or search the Internet for state adoption subsidies.
Crowdfunding: Websites like GoFundMe can help raise contributions.
Employer Assistance: Some companies, as part of their employee benefits offer adoption assistance (as described above).
Prospective Grandparents: Future grandparents may be willing to help.
The federal adoption tax credit and various financing options provide essential support for those ready to grow their families through adoption. Understanding eligibility, documenting qualified expenses, and utilizing available financial resources can make the adoption process more affordable and accessible. With careful planning and awareness, many more families can experience the joy of adoption without overwhelming financial strain.
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