Preface: “Your greatest contribution to the kingdom of God may not be something you do but someone you raise.” — Andy Stanley
Tax Credit for Adoption Costs
If you incur costs related to the adoption of a child, you can claim up to $15,590 as a tax credit in 2023.
In addition to the Adoption Credit, up to $15,590 of adoption costs provided by your employer can be completely excluded from your taxable income. Just make sure you don’t try to claim credit for costs you are also excluding.
The credit is non-refundable, which means you cannot claim more credit in a single year than you have tax liability. For this reason, A portion of the unused credit can be carried forward for use in up to five future tax years.
After a successfully completed adoption, an adopted child is treated the same as any other child for purposes of all dependent-related tax benefits such as the Child Tax Credit, Earned Income Credit, and Head of Household filing status.
What Costs Are Eligible?
For purposes of the Adoption Credit and Adoption Exclusion, the child you are adopting must be under 18 years old or physically or mentally incapable of self-care. The child cannot be your spouse’s child.
The metric the IRS uses to decide if a cost is qualified is if it is “reasonable and necessary” for legal adoption of a child. This typically includes court costs, attorney fees, and travel costs, including meals and lodging. Costs of surrogate parenting are not eligible.
Limits on the Credit
The limit of $15,590 applies to all costs incurred toward a successful adoption, even if it takes place over multiple years.
If an adoption attempt is unsuccessful and a new adoption attempt is begun, the costs of the unsuccessful adoption are considered part of the new adoption attempt.
This dollar limit applies separately to the credit amount and the exclusion amount.
Your ability to claim the credit or to exclude employer-provided costs will begin to phase out if your Modified Adjusted Gross Income (MAGI) is over $239,230 in 2023. It completely phases out if your MAGI is over $279,230.
To figure this phase out, MAGI means Adjusted Gross Income (AGI) modified to add back most Schedule 1 deductions and any excluded foreign income.
Foreign vs. Domestic Adoption
If the child you are adopting is not yet a U.S. citizen or resident at the time the adoption begins, the adoption is considered a foreign adoption. This means that you must wait until the adoption is final before taking the credit or excluding any employer-provided adoption costs. In the year the adoption becomes final, you may take credit and exclude all amounts eligible up to and including that year. Additional costs incurred in future years may be credited or excluded in the year they are paid.
For a domestic adoption, all credits and exclusions incurred before the adoption is final may be taken in the year following when they are incurred, even if the adoption is not yet final. In the year the adoption is final and in subsequent years, the credits and exclusions are taken in the year incurred, the same as for a foreign adoption.
Special Needs, Special Adoption Credit Rules
If you are adopting a child in a domestic adoption who is determined by a state to have special needs, you may claim the maximum amount of the credit in the year the adoption becomes final, regardless of costs you actually incurred. In this case, you will not claim the credit in years before the adoption becomes final. The credit is still non-refundable and is still subject to the same income phaseout.
For a child with special needs, you may also exclude the maximum amount of income regardless of whether your employer actually provided any adopted-related costs, but only if that employer has in place a written qualified adoption assistance program.