Thursday 27th of April 2017

Adoption Tax Credit

The adoption tax credit was passed by Congress and signed by President Clinton in August of 1996 as part of the law that raised the minimum wage. It does two things: 1) provide a tax credit of up to $5,000 ($6,000 for domestic special-needs adoptions) per adoption to families whose adoptions take place before December 31, 2001, and 2) allow employers to provide adoption assistance benefits free from Federal income tax.

In this article I will only discuss international adoptions, since the law is a little different for domestic ones. I will quote from IRS Bulletin 97-9, which was issued by the IRS early this year to implement the credit. In addition, the IRS has issued the paperwork, Form 8839 with instructions, as well as a bulletin, Publication 968, explaining the benefits. You can call the IRS at 1-800-TAX-FORM to obtain these publications.


The expenses must have been paid after December 31, 1996. So whatever expenses you paid before that date would not be covered, even if you actually adopted during 1997 or later. If you adopted prior to that date, but had expenses related to the adoption, such as post-placement social worker visits or readoption expenses that came due and were paid during 1997 or after, you will be able to claim them during the year they were paid. If you have expenses during 1997 and adopt during 1998, you can claim the 1997 expenses on your 1998 tax return.

Covered Expenses

This is how the IRS has defined expenses that will be covered under the credit:

"Qualified adoption expenses" include the reasonable and necessary adoption fees, court costs, attorney's fees, traveling expenses (including amounts expended for meals and lodging) while away from home, and other expenses that are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer.

Income Limitation

Families whose adjusted gross income (AGI) is less than $75,000 are entitled to reimbursement up to the full credit. Your adjusted gross income (AGI) is the amount on the last line of the first page of Form 1040, and on the first line of the second page (lines 30 and 31). It is limited for families whose AGI is between $75,000 and $115,000 in the year the credit is claimed, and families whose income is higher than $115,000 are ineligible. Generally, it is the total of all your sources of income, including wages, interest, dividends, and self-employment income, less whatever business or investment losses you claim, and less deductible contributions to an IRA or 401K or similar pension plans.

If your AGI falls between the two amounts, the available credit is figured proportionally. So, for instance, $90,000 is exactly in the middle of the two amounts, and a family with an AGI of $90,000 is entitled to a credit of $2,500.

Carrying Over the Credit

If your total Federal income tax burden is less than the amount you're entitled to for the credit, you have five years to claim it.

First, a digression for those of you who might not understand how your income tax return works:

Your income tax responsibility to the Federal government is not the same as what you have to pay with your tax return, or any refund you may get. What you pay the government each year is based on your income, and during the year, money is deducted from your paycheck roughly proportional to the total bill. When you file your income tax return, you (or your tax preparer) figure out the exact amount of your tax bill, and you list the exact amount you've already paid. If you didn't pay enough (via payroll deductions, other withholding or estimated tax), then you have to include a check for the balance with your income tax forms; if you paid more than you owe, you'll be getting a refund.

Your tax obligation for the year is on line 51 of Form 1040. If it is less than the amount you're entitled to receive for the adoption tax credit, you can claim the rest of it during the following four years.

What Happens When You File

I will give a very general example here. Say you made $52,000 during 1997, and you paid $13,000 for an adoption from China, which was paid for and took place during that year. Every week, your gross income was $1,000 and $200 was deducted from your check for Federal income tax.

So the total amount withheld was $10,400. When you prepared your taxes, your total tax for that year (the amount on Line 51) was $4,000. If you didn't have the adoption tax credit, you would get a refund of $6,400 ($10,400 minus $4,000), which is the difference between what you paid already and the total amount of your tax bill.

However, you are eligible for a $5,000 adoption tax credit. So you will get a tax refund of the entire amount you paid during the year, or $10,400. You will use up $4,000 (your tax obligation for the year) of your credit. You still have the remaining $1,000 to reduce your taxes for next year.

Please note that the credit is subject to the Alternative Minimum Tax, which is too complicated to explain here, but may limit your credit during any particular tax year.

Employer Benefits

If you are lucky enough to have an employer who provides benefits for adopting parents, the new law may allow you to get these benefits tax-free.

It is subject to many of the same limitations as the credit. So for international adoption, it is limited to no more than $5,000 for a family whose adjusted gross income is less than $75,000, and less for families whose AGI is between $75,000 and $110,000. Families whose AGI is more than $110,000 are not eligible.

The same costs are covered by both credits. But you can't claim the same expenses twice. So, for example, you could claim $5,000 (say, expenses of preparing your dossier, agency fee, air fare to your child's birth country) for the tax credit, and $5,000 (orphanage donation, hotel and food expenses during the trip, visa and passport fees) for the employer benefit.

If this provision were not included in the law, then whatever adoption benefits you received from your employer would be taxable. So you would have to pay income tax on the money you received.

You will have to pay income tax on benefits from your employer that exceed the amount you're entitled to. So, for instance, if you're entitled to a $3,000 exclusion, and your employer gives you an adoption benefit of $3,500, you'd have to pay income tax on the difference, or $500.

Also, you will still have to pay social security tax, Medicare tax, and state income tax on the entire employee benefit amount.

Changing Your Withholding

Once you've figured out what you're entitled to from the adoption tax credit, you have two choices on how you'll get this money: either you can wait until you file your income taxes, and get a big refund, or you can change your withholding so each week you'll keep more of your paycheck, and get your normal refund.

Note that during the year you adopt, you'll have other issues that will probably reduce your income tax obligation--you'll have another dependent; your tax status may change from single to head-of-household, which means you'll be taxed at a slightly lower rate; and you may have child-care expenses for which you may be eligible for another credit. Your income will probably be lower, since you may take time off for an adoption trip and you and/or your spouse may take unpaid leave for weeks or months to spend with your child when you get home. On the other hand, you may be subject to the alternative minimum tax, which would limit the credit.

You may want to talk to your tax preparer or purchase a computer tax preparation program to help you figure how these benefits will affect your particular situation.

Roberta Ferdschneider lives in Brooklyn, New York, where she has worked for H&R Block as a tax preparer for several years. She is adopting her first child, Juliette Peiyue, from China on February 3, 1998, and she will be eligible for the full tax credit. She can be reached at 718-398-8554, or via e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it.">This email address is being protected from spambots. You need JavaScript enabled to view it., after February 15 to consult on tax preparation issues.

Editors note: Roberta can work with families who live anywhere in the U.S. on their personal taxes.

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