The Adoption Tax Credit

If you are in the process of adopting, or you know someone that is, you will know that it is a very financially daunting process. The IRS appears to know this, too, as it offers an adoption tax credit for qualifying expenses related to adoption.

The credit is available for qualified adoption expenses, which IRS Code Section 23(d)(1) defines to include “reasonable and necessary adoption fees, court costs, attorney fees, and other expenses . . . directly related to, and [with] the principal purpose of” the legal adoption of an eligible child. The credit has an income limit set at $256,660 in 2021. The total available tax credit in 2021 is capped at $14,660 per eligible child. The credit amount available generally increases slightly each year. This is a dollar-for-dollar credit, meaning every dollar spent within the credit amount will be reduced from the overall taxes owed by the taxpayer.

This credit is nonrefundable, meaning if you cannot use the entire credit amount in one year, the IRS will not pay it back to you as a reimbursement. Instead, any credit not used up will carry forward up to five years and can be used for later expenses. The timing rules for the tax year in which the credit can be claimed are a bit tricky, with different rules for domestic and foreign adoptions. The professionals at The Center for Financial, Legal, and Tax Planning, Inc. are more than knowledgeable with regards to the adoption tax credit. Please contact us at (618) 997-3436 for more information.