When you adopt a child, you could bring home more than a bundle of joy. You may also be in line for a valuable tax credit.
For 2022, a tax credit of up to $14,890 for adoption of a special needs child can come in handy for qualified parents facing the daunting costs of adoption (up from $14,440 for 2021). For other adoptions the credit is equal to qualified adoption expenses, up to a maximum of $14,890.
Income limit: For 2022, the credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) of $223,410 and is eliminated for those with MAGI of $263,410 or more.
Experts estimate the entire adoption process can set parents back $25,000 or more. Here are some details of this tax break:
Qualifying expenses. The credit can be used for each child you adopt, in the United States or abroad. To be eligible, the IRS requires the expenses to be "reasonable and necessary" for adoptions of children under age 18. They include court costs, attorney fees and travel expenses.
Some expenses are not eligible. The IRS specifically excludes some outlays, such as those paid for a surrogate parenting arrangement and the costs incurred to adopt your spouse's child. And if you're remarried, you can't claim the credit for adopting the child of your new spouse.
The value of a credit. If you qualify, the adoption credit can reduce your tax liability on a dollar-for-dollar basis. This is much more valuable than a deduction, which only reduces the amount of income subject to tax. The credit is subject to being phased out depending on your adjusted gross income.
Documentation requirements. Eligible taxpayers must attach copies of certain documents such as an adoption order or decree.
Potential double bonus. If you're fortunate enough to have an employer who pays for adoption expenses, some or all of money could be tax-free. You can get the benefits of both the tax credit and the income exclusion for the same child as long as they're not claimed for the same expenses.
When Should you Take the Credit?
| Adopting a child who is a U.S. citizen/ resident | |
| IF you pay qualifying expenses in: | THEN take the credit in: |
| Any year before the year the adoption is final. | The year after the year of the payment. |
| The year the adoption is final. | The year the adoption is final. |
| Any year after the year the adoption is final. | The year of the payment. |
| Adopting a foreign child | |
| IF you pay qualifying expenses in: | THEN take the credit in: |
| Any year before the year the adoption is final. | The year the adoption is final. |
| The year the adoption is final. | The year the adoption is final. |
| Any year after the year the adoption is final. | The year of the payment. |
Here is a chart from the IRS that shows when parents should take the adoption credit:
For more information on the subject, consult with your tax advisor.