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This article was fact-checked by our editors and a member of the Credit Karma Tax® product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2020 tax year.
If you’ve considered adopting a child, you’ve probably thought about whether you’re ready to open your heart and home to a new family member. But you’ll also need to open your wallet, and depending on how you choose to adopt, the costs can be steep.
Fortunately, the adoption tax credit can help offset certain adoption-related costs for parents who qualify to take the credit.
Let’s look at the credit, who can claim it, how much it can be worth and other important things to know about the adoption tax credit.
- How much does adoption cost?
- What is the adoption tax credit?
- What expenses qualify for the adoption tax credit?
- How much is the adoption tax credit worth?
- How do I qualify for the adoption tax credit?
- How do I claim the adoption tax credit?
- When can I claim the adoption tax credit?
- What is the income exclusion for employer-provided adoption assistance?
It’s difficult to find statistics on just how many kids are adopted in the U.S. each year. While state and federal governments keep track of the number of children adopted from foster care and foreign countries, there’s no good source of data on adoptions through private agencies. But multiple sources estimate the number of children adopted each year exceeds 100,000.
Adoption outside the public child welfare system involving an attorney can cost around $15,000 to $40,000, according to the Child Welfare Information Gateway of the U.S. Department of Health and Human Services. Private agency adoptions conducted outside the public child welfare system often run around $20,000 to $45,000. A home study (review of the adopting parents’ home sometimes required before an adoption is approved) alone can cost between $1,500 and $4,000.
Adopting a child from foster care costs much less. Federal and state programs can help adoptive parents cope with costs associated with adopting children from foster care. And children adopted from foster care may also qualify parents to receive a one-time reimbursement for certain adoption costs and monthly maintenance payments to help care for the child.
Bottom line: Adoption can be costly. The good news: The adoption tax credit can help with your federal taxes at tax time.
The adoption tax credit is available for adoptions of an eligible child. This includes children younger than 18 and anyone older than 18 who’s physically or mentally incapable of taking care of themselves. Keep in mind that if you’re a stepparent adopting your spouse’s child, you are not eligible for this credit.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of federal income tax you must pay.
Not all adoption-related expenses will necessarily be eligible for the credit. The IRS specifies these costs as qualified adoption-related expenses for purposes of claiming the adoption tax credit.
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Traveling expenses (including money spent on meals and lodging while away)
- Other expenses that are directly related to the legal adoption of an eligible child (such as a home study)
The adoption tax credit is worth up to $14,300 per child for the 2020 tax year, helping to cover qualifying expenses associated with adopting an eligible child. This is a nonrefundable tax credit. That means it’s limited to your tax liability for the year, reducing it dollar-per-dollar up to the full amount of the credit. If a nonrefundable credit reduces your tax liability to zero, you can’t get any excess credit back as a refund.
But if you have any leftover credit in excess of your liability, you can claim the remaining credit on future tax returns for up to the next five years.
Here’s an example of how that could work.
- You adopt a child in the current tax year and have qualified adoption-related expenses of $10,000.
- Because your qualified expenses are below the $14,300 expense limit, your total adoption tax credit will be for the full amount of your qualified expenses — $10,000.
- Your federal income tax obligation for the year is just $2,000, leaving you with $8,000 in excess credit.
- You can apply that credit toward your federal income tax obligation for the next five years or until you use up all the credit, whichever comes first.
Exceptions for special needs children
If you adopt a special needs child, you could qualify for the maximum credit amount even if that amount exceeds your actual qualified adoption expenses. For the purposes of the credit, a child who is a U.S. citizen or legal resident of the United States is considered to be special needs if they can’t or shouldn’t be reunited with their birth parents and they have a condition or circumstances (for example a disability) that could make them unadoptable unless their adoptive families get some assistance.
If you are adopting an eligible child and have qualifying adoption-related expenses, it’s worthwhile to investigate whether you can take the adoption tax credit on your federal taxes. But even if you adopt an eligible child and have qualifying expenses, there are limits on who can get the credit.
There are income limits for claiming the adoption tax credit. Here they are for the 2020 tax year.
- $214,520 or less: If your modified adjusted gross income, or MAGI, is $214,520 or less, you may be eligible for the entire credit.
- $214,521– $254,519: The credit is reduced for taxpayers with MAGI between $214,521 and $254,519.
- $254,520 or more: If your MAGI is $254,520 or more, you’re no longer eligible for the credit.
The credit phases out proportionally. For example, if a taxpayer’s income is $231,160 — roughly the midpoint of the phaseout range — the tax credit is reduced 50%, meaning it becomes $7,040 per child.
Filing status considerations
You can claim the credit if you adopt alone or split it with the co-parent. Married couples generally must file a joint tax return to claim the adoption tax credit together. For registered domestic partners adopting a child together, you both may mutually agree to split the qualified expense and the resulting credit at tax time.
Most people who use a status of married filing separately can’t get the credit in the first year the qualified adoption expenses are allowable, but there are exceptions. If you’re married filing separately, check out the instructions for IRS Form 8839 to learn about any exceptions.
What is modified adjusted gross income?
Adjusted gross income, or AGI, is all the income you receive in a year minus certain tax adjustments. Modified adjusted gross income, or MAGI, is your AGI plus some deductions you add back in. MAGI helps determine whether you qualify for certain tax breaks.
If you qualify to claim the adoption tax credit, you’ll use IRS tax Form 8839 to do so. Include the name and age of the adopted child, along with the child’s taxpayer identification number on the form. The child’s TIN is typically their Social Security number. If you don’t have the child’s Social Security number, you may be able to use an adoption taxpayer identification number for the child instead. To get an ATIN, you’ll need to fill out IRS tax Form W-7A.
Generally, when you can take the credit will depend on when you paid the qualifying adoption expenses, whether the adoption is within the U.S. or from a foreign country, and whether the adoption was ever finalized.
When you adopt an eligible child who’s a U.S. citizen or resident of the U.S. (or a U.S. possession), if you pay for qualified adoption expenses before the year in which the adoption is finalized, you can claim the credit for those expenses for the next tax year. This is true even if you never finalize the domestic adoption.
For foreign adoptions (of a child who’s not yet a U.S. citizen or resident), you can’t take a credit for any qualified adoption expenses (paid before and during the year of the adoption) until the year the international adoption is final.
If you have qualified expenses after the adoption becomes final, you may be able to claim a credit for the year in which you paid the expenses, regardless of whether the adoption was foreign or domestic.
Some employers offer benefits that help subsidize adoption costs. These benefits may be excluded from your income, or your salary might be reduced by the benefit amount, meaning you won’t pay taxes on this amount. This is different than the adoption tax credit. For the 2020 tax year, the maximum amount that can be excluded from an employee’s gross income for the amounts paid by an employer for qualified adoption expenses is $14,300.
You can’t take the adoption credit for any expenses your employer has reimbursed. You’ll have to reduce your credit amount by the reimbursement amount.
The adoption tax credit can help offset the overall costs of an adoption. Once the adoption is finalized, remember to explore other tax benefits associated with being the legal guardian of another person — you may be able to take advantage of several tax breaks for parents. First, learn if your adoptive child meets qualifications to be claimed as a dependent. You may also want to explore the child tax credit. And if you plan to use child care services so you can work, check out the dependent care tax credit.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.