Most of us have spent 2023 grumbling about the rising costs of groceries while watching current events that impact our daily lives and family budgets. While we all hope for a leveling out of inflation rates in the coming months, many are turning their thoughts to filing taxes. It’s hard to believe it’s time to talk taxes already! If you recently adopted a child (or several!), you are likely interested in maximizing the Adoption Tax Credit before you file your 2023 personal taxes.
The Adoption Tax Credit for 2023 is $15,950 per child. The Adoption Tax Credit is NOT refundable, which means you can only use the credit if you have a federal income tax liability.
We are thrilled once again to offer this updated guest article from our friend, Becky Wilmoth, an Enrolled Agent and Adoption Tax Credit Specialist at Bill’s Tax Service. She covers the necessary details for claiming your 2023 tax filing credit in this guide.
Adoption Tax Credit Guide: 2023
It is very important that families understand that the Adoption Tax Credit can be essential to helping them adopt, whether through the foster care system, domestically or internationally. Adoption is rapidly changing. International adoptions continue to decrease, and the number of children in foster care is around 390,000. The one thing that has remained constant is the need for families to understand the financial resources available to those considering adoption or in the process of adopting. One specific resource is the federal Adoption Tax Credit.
Who can apply for the Adoption Tax Credit?
An adoptive family can apply the Adoption Tax Credit toward their federal tax liability when they file their 2023 tax return. This means the applied credit can reduce what they owe in federal income taxes for the year. It is not a refundable tax credit. However, it’s still available, permanent, and a great credit at $15,950 per child.
**Please note: the Adoption Tax Credit will not cover self-employment tax, early pension distribution penalty, or first-time homebuyer payback.**
How can we qualify for the Adoption Tax Credit 2023?
You qualify for the Adoption Tax Credit if you adopted a child (except your spouse’s child) and paid out-of-pocket expenses relating to the adoption. The tax credit amount you qualify for is directly related to how much you spent on those adoption-related expenses.
Income can also be excluded as taxable through an employer-provided adoption benefits program. Both a credit and an exclusion may be claimed for the same adoption; however, both cannot be claimed for the same expenses.
What expenses are covered under the Adoption Tax Credit?
Qualified Adoption Expenses are allowed under the Adoption Tax Credit and include any expenses necessary for the adoption. A few examples of qualified expenses include:
- court fees
- home study
- lawyer fees
- medical examinations/physicals
- travel expenses (meals, lodging, airline, gas)
- agency fees
- dossier fees
- any other fees that are directly related to the adoption
The most asked question is whether the living expenses of the expectant mom paid by the prospective adoptive parents in domestic infant adoptions are qualified adoption expenses under the Adoption Tax Credit. They are not.
A good rule of thumb when determining what adoption expenses to include for the Adoption Tax Credit is to use those expenses you know are covered. Most adoptions, other than from foster care, will exceed the amount of the credit, so choose the expenses that are clearly considered “qualified adoption expenses” when filing.
When can I apply for the Adoption Tax Credit?
International and foster care adoptions must be finalized before you can apply for the Adoption Tax Credit.
Expenses for domestic (infant) adoptions that are not yet final can be taken the year after the expenses are paid, or you can wait until the adoption is final.
How does the Adoption Tax Credit work?
Line 47 of your Federal 1040 form shows your tax liability. The difference between your tax liability and your federal withholding is either what you get as a refund or what you owe the federal government when you do your tax return.
The Adoption Tax Credit comes in on Line 55 (Other Credits) from Form 8839 and covers your tax liability up to $15,950 per child for 2023. You will get your withholding back (if the tax liability is less than the maximum credit amount), and the child tax credit drops down to an additional child tax credit (if you qualify).
If you do not use al the credit in the first year, you can carry it forward for up to 5 years.
**Please note: IRS Form 8839 is available at www.irs.gov beginning in early 2024.**
The Adoption Tax Credit and Special Needs Adoptions
If you adopt a child with special needs through foster care, you may be entitled to claim the full amount of the adoption credit even if you did not have expenses. Each state has different criteria that qualify a child as “special needs.”
Where do I get a special needs declaration?
The special needs declaration must come from the state where the adoption was finalized. To qualify as a special needs adoption, you must have a signed adoption “Subsidy Agreement” with the state. Some states call it the “Adoption Eligibility Assistance Determination.”
What about a “special needs” international adoption?
Unfortunately, no international adoption is considered special needs for IRS purposes. Therefore, the Adoption Tax Credit will only be for your qualified adoption expenses.
Documentation For the Adoption Tax Credit
You will need to have the following paperwork readily on hand to document your Adoption Tax Credit filing:
- Final judgment of Adoption (all adoptions)
- Adoption Assistance Eligibility Determination (Subsidy Agreement) that declares the child’s special needs, if claiming credit for a child declared special needs by your state through foster care (foster adoptions)
- A home study/placement agreement completed by an authorized placement agency (all adoptions except foster)
- All documentation of paid, qualified expenses (all adoptions except foster)
All documents must be signed and dated for all adoptions. The IRS will not accept any Home study/Placement agreement, judgment of Adoption, or Subsidy agreement/Eligibility agreement without it being signed and dated by the proper authorities.
Do You Need More Information?
CreatingaFamily.org also offers an Adoption Tax Credit Headquarters page, where we have curated the most updated, relevant resources to help you navigate the process of filing your claim.Get this free guide to talking to your children about adoption
Take the Online Course
For even more detailed information about the Adoption Tax Credit, consider the CreatingaFamilyEd.org online course, Adoption Tax Credit 2023. This online, downloadable course is 1 hour long. It offers a Certificate of Completion when you pass the quiz at the end with an 80%. Check with your agency or caseworker to see if this course can count toward fulfilling education requirements.
Here is what you’ll learn in the CreatingaFamilyEd.org Adoption Tax Credit 2023 online course:
- What is a Qualified Adoption Expense for purposes of the Adoption Tax Credit 2023?
- When can you claim the Adoption Tax Credit? (Domestic private adoption, International Adoption, Re-adoption in the U.S. for international adoption, and Foster Care Adoption).
- How does the Adoption Tax Credit work with kinship adoptions? What if the child never was involved with foster care?
- Special Needs Adoption: How does the Adoption Tax Credit differ for adoptions from foster care? What does the IRS accept as proof of “special needs”?
- Can you reclaim your expenses for an attempted adoption that did not result in a placement? How?
- What income level (Modified Adjusted Gross Income) is excluded from claiming the Adoption Tax Credit in 2023?
- Can you amend the previous year’s tax return to claim the adoption tax credit? Is the adoption tax credit something you can amend? If so, how do you amend it, and how many years back?
- Will the Adoption Tax Credit offset self-employment tax?
- How does the Secure Act impact claims for the Adoption Tax Credit for 2023 taxes?
- What should you do if the child’s Social Security Number is unavailable when you file?
- Should you use an Adoption Taxpayer Identification Number (ATIN #) if you don’t have the child’s social security number?
- How does the Adoption Tax Credit work in conjunction with employee adoption benefits?
- How do you find a tax specialist knowledgeable on the Adoption Tax Credit?
- Where should you go to learn more about the Adoption Tax Credit, its history, and how to advocate for it?
Legislative Actions on the Adoption Tax Credit
To learn more about the Adoption Tax Credit, including its history, go to Adoption Tax Credit Advocates. This site also offers information on advocacy for a return to refundability with legislators
National Council for Adoption also keeps track of legislative initiatives, including the Adoption Tax Credit Refundability Act. You can also learn how to make your voice heard.
Thank you, Becky Wilmoth (the author of this guide) and Josh Kroll, the Adoption Tax Credit specialist at Families Rising (formerly NACAC). Each year, they join us for the annual podcast and online course. They are the two most knowledgeable people we know on the Adoption Tax Credit. Our community has found them to be extraordinarily helpful on the topic.