Adoption tax credit

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Adoption Tax Credit

Section 23 of the Internal Revenue code offers a credit for “qualified adoption expenses” paid or incurred by individual taxpayers. The credit is nonrefundable, thus, it can only decrease a taxpayers tax liability to zero. However, if the credit amount exceeds a taxpayer’s total tax liability, the amount may be carried forward for up to 5 years.

Qualified adoption expenses

Qualified expenses include: adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child. 1

Limitations

Under 23(b)(1) the total credit amount in any one year may not exceed $10,000, however that amount is adjusted for inflation. The credit limitation does not apply to the adoption of special needs children. In which case the full $10,000 credit is available in the year the adoption becomes final. The taxpayer is permitted to claim the full $10,000 even if he or she spent less than $10,000 on qualified adoption expenses. 2 If a taxpayer’s adjusted gross income exceeds $150,000 (adjusted for inflation) the adoption credit is phased out when AGI is $190,000 or more. 2

1 IRS Topic 607 - Adoption Credit. http://www.irs.gov/taxtopics/tc607.html.

2 Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 636.