When an individual or a family considers adopting a child, one of the biggest concerns is the high cost of the adoption process. Prospective parents often have to spend large amounts of money before they ever see their potential child. In addition, they may be left with unpaid bills, even if the adoption is ultimately unsuccessful. The federal government initially approved an Adoption Tax Credit in the mid-1990s that would ease the financial burden on an adopting family. Taxpayers who take advantage of the provision can reduce their tax liability for the year. 

About The Adoption Tax Credit

The Adoption Tax Credit was originally instituted as a temporary tax break. First allowed during the 1997 tax year, the credit allowed families with qualified adoption expenses to claim up to $6,000 of these costs per child as a deduction against their tax on the federal return. Over the years, the credit has been extended several times, and the maximum cost limit has increased along with the rate of inflation. The Adoption Tax Credit was finally granted permanent status in January of 2013. Taxpayers who claimed the credit on their 2013 returns could deduct up to $12,970 of their qualified adoption expenses.

What are Qualified Adoption Expenses?

In order to claim the credit, a taxpayer must have paid qualified adoption expenses out of pocket. These costs may include the actual adoption fees, any legal fees that are required to obtain the assistance of a lawyer, travel costs back and forth to visit the prospective child, and court costs associated with the legal process of adoption. The IRS requires that any qualified adoption expenses be both related and necessary to the process.

How the Adoption Tax Credit Affects Liability

Taxpayers who are able to claim the Adoption Tax Credit may receive a substantial break on their taxes for that year. The credit is non-refundable, which means that it can only be used to reduce the overall tax liability. For example, if a taxpayer owes $1,000 in federal income tax, then he or she can only use the Adoption Tax Credit to reduce tax liability down to zero. The excess credit amount cannot be issued as a refund.

However, some taxpayers may be eligible to save their excess Adoption Tax Credit for use in future tax years. The IRS does allow citizens to use up their remaining credit on future returns for a period of up to five years.

The legal process of adoption does not have a direct influence on federal tax payments. However, claiming the Adoption Tax Credit on your qualified adoption costs may help you save money on your tax bill.