Understanding the Adoption Tax Credit
If you adopted in 2020, it is time to consider applying for the Adoption Tax Credit. With the Adoption Tax Credit, certain taxpayers can apply for a credit of up to $14,300 per eligible, adopted child. If granted, the adoption credit would be applied toward the taxpayer’s federal tax liability when the tax return is filed, which would effectively lower the federal income taxes owed.
How Much?
The credit amount is calculated based on your out-of-pocket adoption expenses related to items such as reasonable and necessary adoption fees, court costs and attorney fees, and travel expenses. Expenses, before the child is identified for adoption, may be included in the calculation (think: home study). Reimbursed expenses will not be factored into calculations. You must pay the qualified adoption expenses out of your own pocket to claim this adoption tax credit. If your adoption credit ends up exceeding your tax liability for the year, the left-over credit may be carried over to the following tax years for up to five years.
Eligibility
For the 2020 tax year, taxpayers who earn less than $214,520 in their modified adjusted gross income (MAGI) may be eligible for the full $14,300 adoption credit. Families who earn a MAGI between $214,520 to $254,520 may claim partial credit, and taxpayers whose MAGI is greater than $254,520 may not claim the adoption credit at all.
International, foster care, and private adoptions are all eligible for the credit, but stepparent adoptions are not. If you adopted your spouse’s child, that adoption is ineligible for the adoption credit. For the adopted child to be eligible, the child must be younger than 18 years old or, alternatively, the child may be any age but must be physically or mentally incapable of caring for him or herself.
Timing
When to file the adoption credit may depend on whether the adoption is domestic or international. If domestic and the adoption has not been finalized, you must apply for the adoption credit in the year following the year when you paid your adoption expenses. If international, you must apply for the credit in the year when the adoption becomes final for all the adoption expenses paid before or during the year of the adoption’s finalization. For both domestic and international adoptions, you must apply for the adoption credit in the year of the adoption’s finalization for the adoption expenses paid that same year.
Georgia State Adoption Tax Credit
In Georgia, there is a state adoption tax credit for taxpayers adopting a child who is within the Georgia foster care system and under 18 years old. Beginning the year that the adoption is finalized, the taxpayer is allowed a $2,000 credit per eligible child for every tax year until the child turns 18 years old.
Next Steps
Now that you know more about the Adoption Tax Credit, we recommend reaching out to a tax professional. It is important to understand your options and to file correctly in order to maximize your tax benefits.