Adoptive parents may be able to claim a dollar-for-dollar tax credit up to $13,570 for 2017 (up from $13,460 in 2016) for the “qualified” expenses of adopting a child for each adopted child. That is equivalent to a deduction of over $54,280 for a taxpayer in the 25% tax bracket.
If the adoption credit allowable for the tax year exceeds that year’s tax liability, the excess credit can be carried to the next tax year and added to the adoption credit allowable for that year. The carryover provision is only allowed for 5 years.
In addition, an employee may be able to exclude from his or her adjusted gross income up to $13,570for 2017 (up from $13,460in 2016) of qualified adoption expenses paid by an employer that has an adoption assistance program. Both the credit and the exclusion can be claimed, but not for the same expenses.
The credit is phased out if the taxpayer’s income (modified AGI) exceeds the inflation-adjusted threshold amount and is fully eliminated when the AGI reaches the threshold cap. These values are annually adjusted for inflation. For 2017, the threshold income is $203,540 (up from $201,920 in 2016), and the threshold cap is $243,540 (up from $241,920 in 2016).
Married taxpayers can claim the credit only on a joint return, unless the taxpayers are legally separated or have lived apart for the last six months of the tax year.
Qualified adoption expenses include reasonable and necessary 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 the legal adoption of an “eligible child.” However, the expenses do not include those utilized to adopt a spouse’s child, surrogate mother expenses, or adoption arrangements that are in violation of state or federal laws. Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption can only qualify if the child is actually adopted.
An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. If the child turned 18 during the year, the child is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for himself or herself is also eligible, regardless of age.
There are additional rules related to adopting “special needs” children and foreign children. Please call this office if you have questions regarding “special needs” or foreign adoptions or have additional questions of how the adoption credit will affect your unique circumstances.
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