The IRS and the Federal Adoption Tax Credit

Dear Client,

I hope you are well. Now that your private adoption is complete and tax time is upon us, I want to make sure you are aware of the federal adoption tax credit.

First things first: This credit does not apply to stepchild adoptions. Also, if DCFS reimbursed you for certain expenses, you cannot double dip and claim a federal tax credit for those same expenses. Likewise, if your employer reimbursed you for certain expenses, you cannot claim a federal tax credit for those same expenses; however, you may be able to claim an income exclusion up to the amount of the employer adoption assistance. So, the federal adoption tax credit only applies in certain situations.

If you are married, you must file jointly to claim the credit. You can amend past filings to claim the credit. Also, income limits apply: The full credit is only available if your modified adjusted gross income is $252,150 or less in 2024.

So, what expenses qualify? Answer: Adoption fees, attorney fees, court costs, adoption-related travel expenses including meals and lodging, home study fees, and other expenses directly related to the legal adoption.

The 2024 adoption credit limit is $16,810. The credit limit applies to each adopted child, not each calendar year. So, if you claimed $5,000 in adoption expenses for 2023, then you can claim a maximum of $11,810 in 2024.

Next, I'll quote from the IRS about the relationship of the income exclusion for employer adoption assistance and the tax credit:

The income exclusion is in addition to the credit, but you can’t claim both for the same expenses. You must claim any allowable exclusion before claiming any allowable credit. To do this, complete Part III of Form 8839 before you complete Part II. Example: In 2024, you paid $10,000 in qualified adoption expenses, and your employer reimbursed you for $4,000. You can exclude $4,000 from your income. Your maximum credit is $6,000 ($10,000 less the $4,000 employer reimbursement).

How do you claim the credit or the exclusion? Fill out the IRS Form 8839 and attach it to your tax return. If you need to get an Adoption Taxpayer Identification Number (ATIN), use the Form W-7A.

Other good news: The credit is limited to the amount of tax you owe each year. You may carry unused credit amounts to 5 future years.

About timing, you generally claim expenses each year as you incur them, whether you finalize the adoption or identify an eligible child. However, for foreign adoptions, you claim expenses once the adoption is final.

Though they only apply in certain situations, the federal exclusion and credit can be a big help in the right situations.