The tax cut bill passed in December makes positive changes to the way the Adoption Credit works. We are not tax lawyers, but we can describe, from a family law standpoint, how the program helps adoptive parents.
An Adoption Credit program has existed for years. Its purpose has been to encourage adoption by adding tax incentives for fees incurred by adopting parents. As Congress endeavored to create a much simpler tax system, however, various tax credits were on the chopping block. Well-heeled lobbying groups fought the elimination of other credits but it was impassioned adoptive parents who ultimately saved the adoption tax credit.
The adoption tax credit serves to credit you for deducting qualified expenses involved in adoption: adoption fees, court costs, attorney fees, traveling expenses, and other costs arising directly from adopting a child. This is not the same as a deduction, which decreases your taxable income. Unlike a deduction, a credit allows you to reduce your income tax dollar for dollar.
Facts to bear in mind about the Adoption Credit:
- It is not for everyone who adopts; both the credit and exclusion have income limitations.
- Credit can be taken only for certain qualifying expenses that are directly related to adoption.
- A credit carryover is permitted from one year to the next.
- It applies to all adoptions and adoption efforts (subject to the below age limit).
- It applies only to children under age 18.
- It extends additional benefits to families who adopt children with special needs.
- It does not allow you to claim the credit and exclusion for the same expenses.
The Adoption Credit helps some families make the decision to take on this financial burden. Preliminary tax proposals had eliminated this credit, but Congress responded to the outcry from concerned parents, restoring the credit with some enhancements.