Adoption tax credit

An adoption tax credit is tax credit offered to adoptive parents to encourage adoption.

Section 36C of the United States Internal Revenue code offers a credit for “qualified adoption expenses” paid or incurred by individual taxpayers.^[1] The credit was made refundable in 2010, as part of the Health Care and Education Reconciliation Act of 2010.^[2] It was also credit increased by $1,000 to $13,170 as part of the act.^[3]

Qualified adoption expenses

Under US tax law, qualified expenses include: 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 and for which the principal purpose is the legal adoption of an eligible child. The adoption tax credit is per child, thus the credit doubles when adopting two children in the same year.^[4] It is also important to note that this is a "credit" not a mere "deduction." ^[5] A tax credit is a dollar for dollar reduction of federal tax, not a reduction of taxable income, such as with a mortgage payment.

Parents who adopt a child with special needs (meaning a child who receives adoption assistance/adoption subsidy) can claim the full credit without documenting expenses. (See the IRS FAQs, paragraph 2 of question 1 at http://www.irs.gov/individuals/article/0,,id=231663,00.html.) Parents will need to document the child has special needs, and this documentation can include the adoption assistance/adoption subsidy agreement, a letter from the state/county approving the child for adoption assistance/adoption subsidy, or a letter from the state/county child welfare agency stating that the child has special needs. See question 13 at the FAQs for information about documentation.

Limitations

To be eligible for the full tax credit, the adopting parent's modified adjusted gross income cannot exceed $182,520. The taxable income may reach $222,520, but it is gradually phased out when in excess of $182,520.^[6]

References

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