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2023 Adoption Tax Credit

The 2023 tax filing season is upon us! The Internal Revenue Service recommends taxpayers take time to determine if they are eligible for important tax credits. Many of our adoptive families will be applying for the Adoption Tax Credit. With that in mind, we have compiled some basic information about the 2023 adoption tax credit.

Adoption Tax Credit 101 – for 2023 adoptions (claimed in early 2024)

If you have done any research into adoption financing, you’ve probably heard about the Federal Adoption Tax Credit. But what exactly is this credit, and how does it work?

The Federal Adoption Tax Credit is a non-refundable tax credit that helps families offset the costs of qualifying adoption expenses. Families who paid qualifying adoption expenses in 2023, and owe taxes, may be eligible to benefit from this credit. For adoptions finalized in 2023, there is a federal adoption tax credit of up to $15,950 per child. The 2023 adoption tax credit is NOT refundable, which means taxpayers can only use the credit if they have federal income tax liability.

Parents who are adopting from the U.S. and claiming qualified adoption expenses can claim the credit the year of finalization or the year after they spent the funds. Parents who adopt a child with special needs and are not basing their request on expenses should claim the credit the year of finalization. Parents who adopt internationally cannot claim the credit until the year of finalization.

The credit applies one time for each adopted child and should be claimed when taxpayers file taxes for 2023.

To be eligible for the credit, parents must:

  • Have adopted a child other than a stepchild — A child must be either under 18 or be physically or mentally unable to take care of him or herself.
  • Be within the income limits — Income affects how much of the credit parents can claim. For 2023, the adoption tax credit is fully available in the amount of $15,950 if your modified adjusted gross income (MAGI) is equal to or less than $239,230. If your modified adjusted gross income is more than $239,230 but less than $279,230, you will receive a reduced tax credit. If your modified adjusted gross income is $279,230 or more for the year, you are not eligible for the tax credit.

According to the IRS, “qualified adoption expenses” can include items like:

  • Reasonable and necessary adoption fees
  • Court costs and attorney fees
  • Traveling expenses related to adoption
  • Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child

If you’re not sure whether you are eligible to use the adoption tax credit or if you paid qualifying adoption expenses in 2023, a tax professional will be able to provide more information.

How Much is the 2023 Adoption Tax Credit?

The amount families are eligible to receive from the Federal Adoption Tax Credit depends on a number of factors and will vary based on their unique situation. Families who finalize the adoption of a child with special needs in 2023 and fulfill the eligibility requirements above, can claim the full credit of $15,950 whether or not they had any expenses.

Other adopters can claim a credit based on their qualified adoption expenses, which are the reasonable and necessary expenses paid to complete the adoption that have not been reimbursed by anyone else. If the expenses are less than $15,950, the adopters claim only the amount of those expenses. However, if the expenses exceed $15,950, the adopters can claim up to, but no more than, $15,950, per child.

The Adoption Tax Credit limit is based on modified adjusted gross income (MAGI) and is recalculated each year based on current cost of living. Income affects how much of the credit parents can claim. For the 2023 Adoption Tax Credit, families with a MAGI is equal to or below $239,230 can claim full credit. If your modified adjusted gross income is more than $239,230 but less than $279,230, you will receive a reduced tax credit. If your modified adjusted gross income is $279,230 or more for the year, you are not eligible for the tax credit.

Adoption and taxes can be complicated, and you will likely have questions about the tax benefits available in your specific situation. While we hope you find the information in this post helpful, keep in mind that Adoption Choices does not offer tax advice. Talk to a tax professional for more specific information about how the Adoption Tax Credit can benefit your family.

Future: 2024 Adoption Tax Credit – If you adopt a child in 2024, the credit maximum amount will be $16,810 with an AGI phaseout threshold of $252,150 to $292,150.

Present: 2023 Adoption Tax Credit – If you adopt a child in 2023, the credit maximum amount will be $15,950 with an AGI phaseout threshold of $239,230 to $279,230.

Past: 2022 Adoption Tax Credit – for the past tax year 2022, the maximum adoption credit was $14,890 per child with a phaseout range of $223,410 – $263,410.

Interaction with the Child Tax Credit

The Child Tax Credit changed in 2018, there was also a temporary change in 2021. The amount is now $2,000 per child, but only $1,400 of it can become the refundable additional child tax credit (dependent on the family’s earned income), with the remaining $600 a non-refundable Child Tax Credit. This credit will supersede the adoption tax credit when reducing the tax liability.

To determine the amount of the Child Tax Credit and Additional Child Tax Credit a family uses, a family must complete the Child Tax Credit Worksheet in IRS Publication 972. Software and tax preparers will automatically calculate these amounts.

Taxpayers who can answer “Yes” on the last line of the Child Tax Credit Worksheet may be eligible for the Additional Child Tax Credit, which is a refundable credit (meaning they can claim the credit regardless of their tax liability). To claim the Additional Child Tax Credit, parents must complete IRS Schedule 8812.

How Much Taxpayers Will Benefit

How much, if any, of the adoption tax credit a parent will receive depends on their federal income tax liability in 2023 (and the next five years). In one year, taxpayers can use as much of the credit as the full amount of their federal income tax liability, which is the amount on line 11 of the Form 1040 less certain other credits (see Child Tax Credit above). Even those who normally get a refund may still have tax liability and could get a larger refund with the adoption tax credit. Taxpayers have six years (the year they first claimed the credit plus five additional years) to use the credit.

People who do not have federal income tax liability will not benefit this year. We encourage them to claim the credit and carry it forward to future years since the credit may become refundable again in the future.

Claiming the Adoption Tax Credit

To claim the credit, taxpayers will complete a 2023 version of IRS Form 8839 (available at irs.gov) and submit it with their Form 1040 when they file their 2023 taxes. Most tax software will create this form for you. Before filing, taxpayers should review 2023 Form 8839 instructions (will also be available at www.irs.gov) very carefully to be sure that they apply for the credit correctly and to see if anything has changed. The instructions are needed to calculate how much of the credit will be used.

When claiming the adoption tax credit, you’ll want to be ready with documents such as:

  • The final adoption decree
  • A placement agreement from an authorized agency
  • Court documents
  • A state’s determination for special-needs children, if applicable
When Can I Claim The Adoption Tax Credit?

If the child is born in the United States or is a resident alien, you may claim the adoption tax credit in the year after you incurred the expenses. However, if you completed the adoption process in the same year you incurred the expenses, you may claim the adoption tax credit in that year. Also, if you incur expenses in the year after the adoption is finalized, you may take the tax credit in the year you incurred the expenses. In an international adoption, the adoption tax credit can be claimed only after the adoption is finalized.

Other Adoption Tax Credit Questions:

What If The Adoption Is Unsuccessful?

One of the amazing things about the federal adoption tax credit is that eligibility does not depend on whether an adoption attempt was successful. Indeed, expenses incurred with an adoption attempt of a specific child, whether successful or not, may be reimbursed through the credit. The IRS allows you to treat these adoption expenses in the same manner as expenses you paid for an adoption that was not finalized by the end of the year. However, in an international adoption, the adoption tax credit can be claimed only if the adoption is successfully finalized.

What If My Qualified Adoption Expenses Are Greater Than My Tax Liability?

In its current form, Congress rejected the lobbyists’ plea to make the credit refundable. This would have meant that an adoptive parent would receive a check for the full credit whether or not they owed that amount in taxes for that year. Instead, Congress chose to treat the credit as a true “credit” meaning that the credit can only offset actual tax liability for that given year. If the adoption tax credit exceeds the amount of your tax liability for the year, the good news is that the excess amount of the tax credit can be carried forward for up to five years.

What Type Of Proof Must I Submit To Take The Adoption Tax Credit?

To take the adoption tax credit, you must be prepared to provide documentation to the IRS showing that your expenses are “qualified adoption expenses.” Therefore, during the adoption process, you should keep all of your receipts, invoices, and financial documents relating to the adoption so that you are prepared to submit these documents to the IRS.

What If My Employer Reimburses Me For Certain Adoption Expenses?

It is important to know that if your employer reimburses you for certain adoption expenses, you are permitted to exclude the amount of the reimbursement from your income. In other words, employee adoption benefit programs are tax deductible. You should inquire into whether your employer offers an adoption benefit program. A typical employer contribution is between $5,000 and $25,000.

In addition to this exclusion, you also are permitted to claim the adoption tax credit for the remaining amount of adoption expenses. The thing to remember is that you are not allowed to claim the tax credit and the exclusion for the same expenses. Again, you should consult with a tax professional to determine the extent of the adoption tax credit and exclusion available to you.

Since The Tax Credit Is A Federal Program, Does My State Offer Similar Types Of Tax Credits Or Deductions For Adoptive Parents?

Some states do and some do not. Since every state is different, you should consult with a tax professional to determine the extent of the adoption tax credit available in your state.

Talk to a Tax Professional about Adoption Tax Credit 2023

This is a lot of information, and you probably have more questions about the tax credit for adopting a child in your specific situation. Remember, Adoption Choices does not offer tax advice and recommends that you talk to your tax professional for specific information on how the Adoption Tax Credit can benefit your family.

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