Adoption can be an exciting time for many families, but it can also be a stressful one. Aside from the rigors of the process itself, including paperwork and the possibility of a delayed or failed adoption, families may also experience financial hardship as the adoption unfolds. Fortunately, there are two Federal tax programs that can aid growing families in their adoption dreams. The first is the adoption tax credit, and the second is the income exclusion from employer-provided adoption assistance.
Adoption Tax Credit
The Federal Adoption Tax Credit is a credit that is available to most US families who complete a formal adoption, whether that adoption be domestic or international. This credit is nonrefundable, which means that the credit cannot reduce your tax liability below zero. However, any unused credit can be carried forward for five years.
The credit for tax year 2017 covers up to $13,570 of qualified adoption expenses per child. These expenses must be “reasonable and necessary,” and they include costs like the adoption fees themselves, attorney fees, and plane tickets, meals, and hotels while traveling to complete the adoption. They even include pre-qualification expenses such as a home study or adoption booklet for prospective birth parents.
Eligible children are those under age 18 or anyone who is unable to care for themselves because of a disability. In fact, there are certain circumstances where the government would provide the full credit to adoptive parent(s) of a special needs child, regardless of the expenses incurred. Adopting your spouse’s child would not be a qualifying adoption.
Both domestic and international adoptions are eligible for this credit; the only difference between the two is when you can claim it. For domestic adoption, the credit can be taken the tax year following the year you paid the expenses. This means that parent(s) can receive the credit even in the event of an unsuccessful adoption or one that has not yet been finalized. International adoption is a bit different – expenses are only eligible for the credit once the adoption is finalized.
This Federal credit may be limited based on your income. For the 2017 tax year, if your modified adjusted gross income (MAGI) is above $204,540, your credit will be reduced, and if your MAGI exceeds $243,540, it will be eliminated completely.
Income Exclusion from Employer-Provided Adoption Assistance
There are some employers who offer adoption assistance as a benefit to their employees. The IRS would traditionally see this as a fringe benefit, and the amount of assistance provided would be taxed as additional income to the employee. However, the Federal government offers an income exclusion for this fringe benefit. To qualify, you must meet all of the qualifications for the adoption credit, and the maximum amount you can exclude from your income is the same amount as the credit – $13,750 of eligible expenses for 2017. The thing you must remember is that you cannot use the same expenses to qualify for both the credit and the income exclusion. For example, if you have a total of $20,000 of eligible expenses, you can apply $13,570 to the credit, and exclude the remaining $6,430 from your income (or vice versa). We can help you determine whether the credit or the income exclusion (or what combination of both) would be best for you.
The Future of the Adoption Credit
In November and December 2017, Congress worked toward a tax bill that would alter many aspects of our current tax system. Legislators introduced tax bills to both the House and the Senate, and one of the initial proposals was to eliminate the Adoption Tax Credit. In later versions of the bill, the credit was restored, and the credit was also preserved in the Senate bill. At this time, the House and Senate are working to consolidate their two bills into a final version that can pass in both chambers. Eliminating the credit appears to be off the docket, so for now, it appears that the Adoption Tax Credit is here to stay.
If you have been considering adoption and would like more information about these two governmental programs, contact our Spire Group professionals. We would love to help you on your adoption journey.