Many people who hear how expensive adoption is do not realize what a dramatic difference the adoption tax credit makes. The tax credit for adoption is $10,000. This is not a deduction where you deduct adoption expenses from your taxable income. This is an actual credit, meaning you pay less money in taxes. For most people, that means you will be getting quite a refund!
This one-time tax credit is available to those who adopt internationally as well as those who adopt US infants or US children in foster care, unlike the ongoing monthly subsidies for medical or psychological care or special needs which are available only to those adopting from the foster care system.
The disadvantage of this tax credit is that it is generally for the year in which the adoption is finalized, not the year your child comes home or the year you pay the fees. This means your refund could be nearly two years after you pay out the money, depending on timing. For example, when we adopted from Korea we paid the larger part of our fees in August of 2000. Our daughter arrived home in December 2000 but the adoption was not finalized until 2001. Therefore it was spring of 2002 before we received the refund from claiming the tax credit on our 2001 taxes. We took out a home equity loan to pay the adoption fees, making the minimum payments for 18 months and then paying it off in full when we got our refund. It was much less scary to borrow the money knowing that refund would be coming!
You will need to document expenses for the adoption. Qualifying expenses include “reasonable” agency and adoption fees, attorney fees, travel expenses including meals and lodging, and “other expenses directly related to, and for which the primary purpose of is, the legal adoption of a minor child.”
Expenses which were reimbursed (such as through an employer’s adoption assistance policy) may not be claimed, but in some cases may be claimed as a deduction from your gross income. For example, if you paid $18,000 in total adoption expenses and your employer reimbursed you for $5000, you would receive the $10,000 tax credit (therefore in the end you will only have spent about $3000 of your own savings on the adoption) and you may also be able to have your taxable gross income reduced by $5000.
The credit is reduced and then eliminated for those making an “adjusted gross income” of $200,000 per year.
For information specific to your situation, see this link
on the IRS website or consult your attorney or tax preparer.
Please see these related blogs:
The IRS Adoption Tax Credit and Special Needs Adoption Information
Funding Your Adoption – Grants and Loans
Financial Assistance in Adoption