February 8, 2024

Understanding the 2023 Federal Adoption Tax Credit

 

Adoptive families who incurred expenses for a domestic adoption OR finalized an international adoption in 2023 should familiarize themselves with the Federal Adoption Tax Credit, which offers financial assistance to offset adoption-related expenses. Here's what you need to know:

Overview:

  • The Federal Adoption Tax Credit for 2023 can reach up to $15,590 per child.
  • This credit is non-refundable, meaning it's applicable only if you have federal income tax liability.
  • Adoption-related tax benefits include a tax credit for qualified adoption expenses paid and an income exclusion for employer-provided adoption assistance.

Eligibility:

  • The child must be under the age of 18 at the time of adoption, or if turning 18 during the year of finalization, refer to specific instructions, linked below.
  • Children adopted who are physically or mentally unable to care for themselves are also eligible.

Income Limits:

  • Modified adjusted gross income determines the amount parents can claim.
  • Full credit can be claimed for incomes up to $239,231.
  • Partial credit applies for incomes between $239,231 and $279,230.
  • Incomes above $279,230 are not eligible for the credit.

Qualified Adoption Expenses:

  • These expenses must be reasonable and necessary to complete a legal adoption.
  • Examples include adoption agency fees, attorney fees, court costs, travel expenses, and more.
  • You cannot claim expenses reimbursed by others or amounts exceeding what you paid.
  • The maximum claimable amount per child is $15,950.

Employer-Provided Adoption Benefits:

  • Benefits received from employers may be excluded from income.
  • Use Form 8839 to determine eligibility and amounts.

When to Claim the Credit or Exclusion:

  • For domestic adoptions, expenses can be claimed in the year following payment, even if the adoption is not yet finalized.
  • For international adoptions, the credit cannot be claimed until the adoption is finalized.
  • Special circumstances apply for children with special needs.

Documentation:

  • Keep all receipts related to adoption, including agency fees, home study expenses, legal fees, travel costs, and more.

Remember, seeking assistance from a qualified tax preparer is recommended to ensure proper claiming of the 2023 Federal Adoption Tax Credit. For more detailed information and instructions, refer to Form 8839 and consult a tax professional as needed.

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