Taxpayers who have adopted or tried to adopt a child may qualify for a tax credit.
The adoption credit is nonrefundable, which may reduce taxes owed to zero. If the credit exceeds the tax owed, there is no refund of the additional amount. In addition, if an employer helped pay for the adoption through a written qualified adoption assistance program, that amount may reduce any taxes owed.
For example, the maximum adoption tax credit and exclusion for 2016 is 13,460 dollars per child. If the credit exceeds the tax owed, taxpayers can carry any unused credit forward. The unused credit in 2016 can reduce taxes for 2017. Use this method for up to five years or until the credit is fully used, whichever comes first.
An eligible child is an individual under age 18 or a person who is physically or mentally unable to care for themselves. Adoption expenses must be reasonable, necessary and directly related to the adoption of the child. Types of expenses may include adoption fees, court costs, attorney fees, and travel.
Taxpayers can usually claim the credit whether the adoption is domestic or foreign. However, there are different rules regarding the timing of expenses for each type of adoption. A special rule may apply if the adoption is of an eligible U.S. child with special needs. Under this special rule, taxpayers can claim the tax credit, even if qualified adoption expenses were not paid.
In some instances, both the tax credit and the exclusion may be claimed but not for the same expenses. The credit and exclusion are subject to income limitations. These may reduce or eliminate the claimable amount.
Use IRS Free File to prepare and e-file federal tax returns for free. File Form 8839, Qualified Adoption Expenses, with Form 1040. Free File is only available on IRS.gov/freefile.