How the Adoption Credit Can Ease Your Path to Parenthood
Article Highlights:
- Overview of the Adoption Credit
- Eligibility and Definitions
- Financial Considerations
- Specific Circumstances and Rules
- Adoption Process Essentials
- Tax Benefits Beyond the Adoption Credit
Are you in the process of or thinking about adopting? The tax code provides an adoption credit, offering financial relief to taxpayers for eligible expenses when they adopt a child. For the 2025 tax year, there have been notable enhancements to the adoption credit.
Overview of the Adoption Credit
The adoption credit helps adoptive families by offsetting some of the costs of adoption. In 2025, the credit caps at $17,280 for qualified expenses per adoption (not per return). A pivotal update this year is that part of the credit, up to $5,000, is refundable. This new feature allows adoptive families to receive a cash refund if the credit exceeds their total tax liability.
Eligibility and Definitions
Eligible Child:
An eligible child is under 18 or cannot care for themselves due to physical or mental challenges.
Special Needs Child:
A special needs child is harder to place for adoption. This may be due to age, race, medical conditions, disabilities, or being part of a sibling group that should stay together. Usually, states decide if a child has special needs. Starting in 2025, Indian tribal governments can also make this decision.
Important:
Normally, the credit cannot exceed the adoption expenses a taxpayer pays. For special needs children, the law treats expenses as equal to the year’s maximum credit, even if actual costs are lower.
Qualified Adoption Expenses:
Qualified expenses are reasonable and necessary costs for legally adopting an eligible child. Examples include adoption fees, court costs, attorney fees, and travel.
Expenses do not qualify if they cover a surrogate arrangement, a spouse’s child, or are paid by federal, state, or local programs.
Financial Considerations
Refundable vs. Non-Refundable Credit:
The new refundable portion allows families to benefit even if their tax liability is low. Families can carry forward the non-refundable portion for up to five years.
Higher Income Credit Phase-Outs:
In 2025, the credit starts phasing out for taxpayers with a modified AGI over $259,190. It phases out completely at $299,190. Families in this range receive a reduced credit or no credit if above the top. Thresholds and caps are the same for all filing statuses and adjust yearly for inflation. Carryover credits are not subject to phase-out rules.
Specific Circumstances and Rules
Failed Domestic Adoptions:
If a domestic adoption attempt fails, parents can still claim the credit for expenses paid for the attempt.
Foreign Adoptions:
For a foreign adoption, parents can claim the credit only after the adoption is finalized. They may claim expenses in the year they pay them or in the year the adoption finalizes, whichever is later. Obtaining an IR-Visa is required for the adopted child’s entry to the U.S.
Readoption Expenses:
If a child adopted abroad must be readopted in the home state, these expenses are also qualified.
Employer Reimbursement:
Employer reimbursement reduces the amount parents can claim for the adoption credit. Subtract reimbursed expenses from the total adoption expenses.
Adoption Process Essentials
Adoptive Child ID Number:
Each child must have a taxpayer ID, such as an SSN or ATIN. This is required to claim the credit and for tax documentation.
Claiming Expenses:
For adoptions of a child that is not a US citizen or resident, parents can claim the credit once the adoption is finalized. For adoptions of a child that is a US resident or citizen, expenses can be claimed in the year after the year they were paid if the adoption is not final by the end of the year, in the year paid if paid the year the adoption becomes final, and if paid in a later year, the year paid.
Strategic Planning:
The credit is a useful financial planning tool. Families should consider income, expected expenses, and tax liability when planning an adoption.
Tax Benefits Beyond the Adoption Credit
Adoptive parents may be eligible for several tax benefits beyond the adoption credit. These benefits can help alleviate some of the financial burdens associated with adopting a child. Here are some notable tax benefits that may apply to adoptive parents:
Adoption Assistance Programs:
Many employers reimburse qualified adoption expenses. Reimbursements up to $17,280 (2025) can be excluded from taxable income or used to claim the adoption credit. The same expenses cannot be used for both.
Child Tax Credit:
Adopted children under 17 qualify for a $2,200 Child Tax Credit.
Child and Dependent Care Credit:
If parents need childcare to work or look for work, they may qualify for a credit. This applies to children under 13.
Earned Income Tax Credit (EITC):
Adopted children can be qualifying children for EITC, benefiting low- to moderate-income families.
Medical Expense Deductions:
Unreimbursed adoption-related medical costs over 7.5% of adjusted gross income may be deductible.
State Adoption Tax Credits:
Some states offer additional credits or deductions. Rules vary by state.
Retirement Accounts:
Parents can withdraw up to $5,000 from 401(k)s or IRAs after adoption without the 10% early withdrawal penalty.
Important:
Each benefit has rules and limits. Parents should review IRS guidelines or consult a tax professional.
Conclusion
With the changes for the 2025 and future tax years, the adoption credit becomes even more beneficial, particularly with the introduction of a refundable portion. Understanding the nuances of eligibility requirements, phase-out thresholds, and specific rules regarding failed, domestic, and foreign adoptions is essential.
By carefully planning and coordinating with this office, adoptive families can maximize the benefits of the adoption credit, alleviating some of the financial pressures of growing their families through adoption.
Visit us at www.Fiducial.com/consultations with any questions!
