What Is the Adoption Tax Credit?

Every year, thousands of families in the U.S. have the pleasure of adopting a child and welcoming them into their homes. And as with any growing family, there are expenses associated. To stave off some of the costs that could prevent a family from affording the option of adoption, the federal government introduced the Adoption Tax Credit (ATC).

This page will walk you through the benefits the ATC provides, eligibility requirements and the most recent updates made for the incoming year.

Contact a financial advisor for assistance if you need help with this or any other tax credits you qualify for.

The Adoption Tax Credit is a federal credit for qualifying taxpayers who participated in international, domestic, private, or public adoption. The credit can be issued in one of two ways;

1. Claiming qualified expenses: The first way is to seek credit through qualified adoption expenses. Qualified expenses are any adoption-related expenses such as:

Adoption agency fees
Legal adoption fees paid to an attorney
Court costs
Travel reimbursement including meals and lodging

To claim these expenses towards your credit, you’ll need to file Form 8839 with your tax return. The IRS will only provide a credit up to the amount of the expenses, not to exceed the credit maximum. This is for all adoption types; international, domestic, private, or public.

Example: The 2022 max ATC was $14,890. Family A had $35,000 in qualified adoption expenses from the legal fees and travel related to international adoption. It could only receive $14,890 in credit because that was the max per child. Family B had $10,000 in qualified adoption expenses from their adoption. It only received $10,000 in credit, because they only spent $10,000.

2. Adopting a special needs child: If the child you adopt meets the eligibility for a special needs adoption then you will receive the full tax credit regardless of the expenses incurred.

Example: A couple adopted a child from the state that was deemed special needs. The couple paid no expenses for the adoption, but since the adoption qualifies as special needs, they will receive the full $14,890 credit.

How Does the Adoption Tax Credit Work?

Like all tax credits, the Adoption Tax Credit is directly subtracted from the taxes you owe. This is often favorable to a tax deduction which only reduces your taxable income. More taxpayers see a better return this way because once they satisfy their tax liability (anything they own in taxes) the remaining credits are refunded back.

Example: A family originally owes $1,000 in 2022 tax costs. Since the family finalized an adoption in 2022, it now receives both an adoption tax credit (say it got the full credit at $14,890) and a child tax credit (which is $2,000).

Adoption Tax Credit Updates for 2023

Recent economic changes have caused inflation to run rampant. As a response, the federal government has adjusted several tax codes to account for the rising costs of living. The Adoption Tax Credit was one of the tax codes positively affected by the adjustment. Below we’ll discuss the change as well as more general ATC information.

How Much Is the Adoption Tax Credit?

The Adoption Tax Credit for tax year 2023 (which you would file in 2024) is $15,950, a $1,060 jump from 2022. This large of an increase is uncommon, especially in recent years. For instance, in the past six years, the average has been a $238 increase with the largest increase being in the past year from 2021 to 2022 where taxpayers saw a $450 jump.

Who Qualifies For The Adoption Tax Credit?

Eligible parties for tax year 2023 Adoption Tax Credit include:

Taxpayers adopting a child under 18 years of age. If the child exceeds 17 years old, he must be unable to physically care for himself for the adoptee to qualify for the ATC.
Taxpayers who participate in adoption that is international, domestic, public or private.
Taxpayers whose income is below $239,230 can claim up to the full credit.
Taxpayers whose income is between $239,230 and $279,230 can claim partial credit.

Ineligible parties for The Adoption Tax Credit include:

Taxpayers who adopted a spouse’s child.
Taxpayers whose income exceeds $279,230.

When Can I Claim the Adoption Tax Credit?

Depending on the type of adoption, the credit can be used if you finalized or started the adoption process in the previous year.

For international or foster care adoptions you cannot claim the credit until the adoption is final.
For domestic adoptions, you can choose to wait until the adoption is final or as the expenses are incurred. The full credit cannot be exceeded but you can spread out the credit over five years if your expenses span over that time period.

Keep in mind that whatever expenses you incurred have to be claimed for that tax year.

Example 1: Family A started and finalized an adoption in 2022. On its taxes, the family can claim its total qualified expenses up to the maximum 2022 ATC.
Example 2: Family B started a domestic adoption in 2020 and was finalized in 2022. It claimed $4,000 in qualified expenses in 2021. It now can claim the remaining allowable credit on its 2022 returns for any additional qualified expenses in 2022.

What Do I Need To File For The Tax Credit?

A document known as the Final Judgment of Adoption is required for all adoptions and additional documents are dependent on the adoption type. Foster adoption requires a subsidy agreement as the additional document. Domestic and international adoptions require a Home Study as the additional document, in addition to a receipt of all qualifying expenses.

The Bottom Line

Like all tax credits, there are rules of eligibility required depending on factors that include the timeline, income, and filing status. Plus additional forms to produce and file with the correct information. With so many rules to follow, it leaves additional room for error on your tax return that could result in you leaving money on the table that you are owed.

That being said, it’s important to keep up with the current laws each tax year so you know what to expect.

Tips for Saving on Your Taxes

A financial advisor can help you optimize your tax strategy for your family’s needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
To make sure you don’t miss a credit or deduction that you qualify for, use a good tax software. SmartAsset evaluated common tax filing services to find the best online tax software for your specific situation.