Adoption Tax Credit: Your Complete How-To Guide
Adoption Tax Credit: Your Complete How-To Guide

Adoption Tax Credit: Your Complete How-To Guide

Adoption can be one of the biggest blessings, but it does usually require the parent or parents to incur many adoption-related expenses. The Adoption Tax Credit offered by the federal government gives you the chance to take a big credit that you can use to offset your tax liability come tax season.

Tax credits give you the opportunity to lessen the amount of tax due to the IRS provided you incurred qualified expenses. This is somewhat different from tax deductibles, which just reduce your taxable income. Some tax credits are refundable, meaning you could receive a tax refund for your tax credit overage amount.

Unfortunately, the Adoption Tax Credit is not a refundable tax credit, but the credit does allow you to carry over any overage to the next few tax years. This means you can use the amount that’s in excess of your tax liability, provided it was originally for the Adoption Tax Credit, as a tax credit on future years’ tax returns.

Tax credits are wonderful tax benefits, which reduce your tax liability if you have any. The Adoption Credit was created as a credit for qualified adoption expenses for newly adoptive parents. Qualified adoption expenses are, for example, meals and lodging while away from home, which depending on where you are adopting from, may be a large expenditure.

What is the Adoption Tax Credit?

The Adoption Tax Credit is a credit you can take on your tax return for qualified adoption expenses. The credit is nonrefundable, meaning you won’t see a tax refund because the credit only applies to your tax liability. On a good note, you can carry forward for up to five years any credit in excess of your tax liability.

Who is allowed to claim the tax credit?

To qualify for this tax credit and any other, you must be a United States citizen or resident alien, and you must file an annual federal income tax return.

In order to be eligible for this tax credit, taxpayers must have adopted a child other than a stepchild. Also, you must be within the income limits as specified by the Internal Revenue Service. This is because your income amount affects how much of the tax credit you can claim on your tax return.

You must be adopting an eligible child to claim this tax credit. An eligible child is one who is under the age of 18 years old or is physically or mentally incapable of self-care.

To find out if you are able to claim the Adoption Tax Credit and to make sure you are eligible for this credit, go to the page on the IRS’s website called Am I Eligible to Claim a Credit for Adopting a Child or to Exclude Employer-Provided Adoption Benefits from My Employer?

What expenses are counted as qualified adoption expenses?

The qualified adoption expenses that count toward this tax credit include certain adoption fees, court costs, attorney fees, traveling expenses, and other expenses that are directly related to and for the sole purpose of legally adopting an eligible child. If you incur traveling expenses, amounts spent for meals and lodging count as qualified adoption expenses.

The traveling expenses, including meals and lodging, are counted if you incurred qualified expenses when trying to achieve a domestic adoption in the prior year. The qualified adoption expenses can be ones that you incurred even if they were paid before an eligible child was identified. So, if you paid for a home study prior to the adoption of a qualified child, you may count those expenses as qualified adoption expenses.

The qualified adoption expenses do include expenses paid by a registered domestic partner who lives in a state that allows same-sex second parent or co-parents to adopt his or her partner’s qualified child, as long as those expenses otherwise qualify for this tax credit.

The tax credit refers to expenses that you had to make sure the adoption becomes final, but luckily, with this credit, you can use quite a bit of the adoption expenses you incurred to offset the amount tax you owe on your annual tax return.

You must use the expenses on your tax return in the year after you incurred them. Any overage is not refundable but does carry over to the next five years.

How much is this tax credit worth?

The maximum amount (dollar limit) for the tax year 2019 is $14,080. This amount was increased to a maximum amount of $14,300 for the tax year 2020. The federal adoption tax credit amount is per child. The tax credit applies one time per adopted child and must be claimed when filing your taxes for the previous year.

How does the tax credit work when filing your taxes?

The tax credit and exclusion benefit are subject to an income limitation and a dollar limitation. The income limit on the adoption tax credit or exclusion is based on your modified adjusted gross income (MAGI). If your MAGI falls between certain dollar limits, your tax credit or exclusion is subject to a phaseout. In other words, it is reduced or eliminated.

For the tax year 2020, the rates have been adjusted. Taxpayers with a MAGI below $214,520 can claim the full credit amount. Taxpayers who have MAGI between $214,520 and $254,520 can claim a partial amount of the tax credit. Those who have income levels above $254,520 cannot claim the adoption tax credit.

You must reduce the dollar limit for the tax year by the dollar amount of qualified adoption expenses that were paid and claimed in previous years for the same adoption effort. Determining the right expenses can be a tricky thing; therefore, it’s often a good idea to hire a professional to do your taxes and to make sure everything is in order.

The dollar limitation applies separately to both the tax credit and the exclusion amount. You may be able to claim both the tax credit and the exclusion for qualified adoption expenses, but you must claim any allowable exclusion before claiming any allowable tax credit.

Taxpayers who adopt a child with special needs in the tax year 2020 and meet the eligibility requirements set forth by the IRS can claim the full amount of the credit, which is $14,300, even if they did not incur adoption expenses.

For taxpayers who wish to claim the credit and who have incurred qualified adoption expenses, expenses used to complete the adoption must not have been reimbursed by anyone. Expenses that count toward this tax credit must be necessary expenses, which were paid to complete the adoption process.

How do I claim this tax credit on my tax return?

To claim the Adoption Tax Credit or exclusion amount, you will need to complete IRS Form 8839: Qualified Adoption Expenses. When you complete IRS Form 1040, 1040-SR, or 1040-NR, you will need to attach Form 8839 to it. If you file online, you won’t need to mail in a copy of your tax return with all documentation, unless you are specifically instructed to do so.

On a side note, you should print a copy of your tax return and the additional forms and documentation that you used to take this tax credit as back-up material in the event you are audited. Having the right documentation to show the IRS agent will save you a lot of headaches.


Have you incurred a lot of expenses related to the adoption process last year? Do you need more information about the Adoption Tax Credit or how to claim the credit in the right way on your tax return? Have you decided to take the tax credit but are confused about the filing process and forms you need to have completed? You need to work with a qualified individual when completing a tax return with tax credits on it.

It’s best to work with a tax accountant when claiming tax credits on your annual tax return. A tax consultant can ensure that your tax return is completed correctly. If you plan on taking this credit or more than one credit, a tax professional is your best bet. He or she would be familiar with the various forms, instructions, and the latest tax rules and regulations.

Do you need a tax professional for help with an upcoming audit, business consulting matters, or the filling of your annual tax return? At Borshoff Consulting, we do it all and are happy to offer you a free tax consultation with a qualified tax professional. You can trust Indiana’s tax expert to give you the best results in doing your taxes or helping with other small business matters.


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