Parents who are adopting a child have a lot on their minds. They also often incur a lot of expenses. But don't forget that there is some relief offered at tax time in the form of tax credits to help offset costs. Here are the key credits available for adoption.
The Adoption Credit allows you to claim up to $13,190 (in 2014) of the expenses of adoption (except in the case of adopting your spouse's child). What kind of expenses? For most adoptions, this can include fees and court costs, attorney fees, and travel expenses (including mileage) related to the adoption of the child. Those adopting a foreign child may be able to include pre-adoption expenses as well. This credit is currently nonrefundable, which means that the credit can only reduce your federal tax to zero but cannot be given back to you if you have no tax liability. However, if your credit exceeds your tax due in one year, it can be carried over to the next year using Form 8839.
While in the process of adopting, such expenses can usually be deducted in the year in which they occur or the following year up until the point at which the adoption becomes final. For foreign adoptions, you must wait until the adoption is finalized before claiming the credit. In this situation, claim all the expenses incurred during the whole process in the year in which the adoption is completed.
Child-Related Tax Credits
New parents may not be aware of the tax credits granted to families with children. The Child Tax Credit is a total of $1000 credit per child, a portion of which may be refundable even if your tax due is zero. The Earned Income Credit is for lower-income families and may add up to as much as $6,143 in 2014. If an adopted child has lived in your home for at least 6 months of the tax year, you may be able to claim this credit if your joint income is less than $52,427 in 2014.
Parents who are adopting a child who does not have a social security number may apply for an Adoption Taxpayer Identification Number (ATIN) using Form W-7A so that they may claim the Child Tax Credit for a child who has been placed in their home. The Earned Income Credit is not available using an ATIN, though.
Before claiming these credits or expenses for an adopted child, it may be best to consult with a professional tax preparer or accountant, such as Cowan Digiacomo & Associates. Some of the rules may be difficult to understand or apply, but it's worth the time and effort to do so since it can mean hundreds or even thousands of dollars for your new family.