By Anna Bahney Originally Posted on 11/30/2014

While the children adopted in 2014 have brought joy to their adoptive families, they have also brought new tax realities for them. Here are some often asked questions about the Adoption Credit on federal income taxes.

What Is The Tax Credit?
The tax credit, for adoptions finalized in 2014, is $13,190 per child. It is not a refundable credit, meaning that taxpayers only receive the credit against a federal income tax liability and that tax payment may be reduced to, but not below, zero.

This credit is designed to offset what the IRS determines to be “qualified adoption expenses,” enabling families who might not otherwise be able to adopt to do so. These expenses include reasonable and necessary adoption fees like court costs, attorney fees and traveling expenses (including food and lodging).

The expenses do not include payments for adopting a spouse’s child, paying for a surrogate parenting arrangement or expenses already paid or reimbursed by an employer. Expenses incurred during an international adoption can only be claimed when the adoption of the foreign child becomes final.

Who Can Claim The Credit?
Parents who are eligible must have adopted a child in 2014 who is under 18 or who is physically or mentally unable to take care of him- or herself. The family also must be within the income guidelines.

Families with a modified adjusted gross income of:

Below $197,880…………..Full Credit
$197,880-$237,880…….Partial Credit
Above $237,880………….No Credit

A family who has attempted to adopt a child who is a citizen or resident of the United States (or U.S. possessed territories) when the adoption process began may be able to claim the tax credit, even if the adoption does not become final. A family who adopts a child with special needs (see more details about what qualifies as “special needs” below) qualifies for the full Adoption Credit, even if there are little or no expenses, once the adoption becomes finalized.

Who Qualifies As Child With Special Needs?
Since the family who adopts a child with qualified special needs receives the full $13,190 tax credit, regardless of their actual adoption expenses, it is important to note who qualifies as a special needs child, for the purposes of the Adoption Credit.

Children adopted internationally do not qualify as special needs for the purposes of the tax credit. Not all children with physical or mental disabilities qualify as special needs. Not even all foster children qualify.

The children deemed special needs are those who meet all three of these requirements from the IRS:

  • The child was a citizen or resident of the United States or its possessions at the time the adoption effort began.
  • A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home.
  • The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include 1) the child’s ethnic background and age, 2) whether the child is a member of a minority or sibling group and 3) whether the child has a medical condition or a physical, mental or emotional handicap.

Often this is a child who is a U.S. foster child getting an adoption subsidy or adoption assistance program benefits, including a monthly payment, Medicaid or reimbursements of nonrecurring expenses.

When To Claim the Credit?
Parents adopting a child from the U.S. can claim qualified adoption expenses the year after they spent the funds. The families adopting a special needs child can claim the credit in the year the adoption is finalized. Those adopting a special needs child can claim the credit in the year the adoption is finalized.