The adoption credit

How it works

The credit covers expenses up to this year's official adoption credit max per child (not yet verified here; see the official source below) for each child, and the cap is per child for the whole adoption. For a child a state has determined to have special needs, the full cap is allowed even when the actual costs were lower. The credit phases out between this year's official adoption credit phaseout start (not yet verified here; see the official source below) and this year's official adoption credit phaseout end (not yet verified here; see the official source below) of modified adjusted gross income. For a domestic adoption, expenses can be claimed the year after they are paid even if the adoption is not final, while for a foreign adoption they are claimed only when it is final. Credit that exceeds the tax owed can be carried forward for up to five years, and a portion may be refundable under conditions the IRS lists. An employer's adoption assistance program can be excluded from income up to the same cap, but the same dollars cannot get both.

What it gives

The per child cap is large, and unused credit carries forward for five years.

A special needs adoption receives the full amount with no receipts required.

Employer adoption assistance can be excluded from income alongside the credit, as long as the dollars are kept separate.

What it costs, or where the catch is

Adopting a spouse's child does not qualify.

Higher income families see the credit shrink to zero across the phase out range.

Foreign adoptions must be final before any expense is claimed, which can delay the credit by years.

A worked example

Farah and Wes paid $21,000 in agency and legal fees to adopt an infant through a domestic agency, and their income is below the phase out. If the per child cap were $16,000, their credit would be capped at $16,000, and the other $5,000 of cost would not be credited. Their tax that year is $6,000, so the credit cancels it entirely and the remaining $10,000, which is $16,000 minus $6,000, carries forward to later years.

Where it goes wrong

A common slip is claiming the credit and the employer exclusion on the same dollars, or claiming foreign adoption costs before the adoption is final.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Tax Topic 607, Adoption credit and adoption assistance programs. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.