What Is an Adoption Tax Credit?

An adoption tax credit is a US benefit provided to families that allows them to offset their annual federal income tax obligation with qualified expenses incurred while attempting to adopt a child. The credit was first introduced into the US tax code in 1996 and has been expanded since then. Some of the particulars of the credit change every time expiring provisions of the law authorizing the credit go up for renewal, but the basic parameters of the credit have remained constant from year to year.

The cost to adopt a child can range from $2,500 US Dollars (USD) to over $40,000 USD, depending upon whether the adoption is public or private as well as domestic or foreign. As a matter of public policy, US lawmakers encourage families to adopt children by providing them with a way to recoup some of that expense through an adoption tax credit. This credit provides a dollar for dollar reduction in the amount of federal income tax owed in the year the credit is claimed, up to certain maximum limit. For example, if a taxpayer owes $10,000 USD in federal income tax but has an adoption tax credit in the amount of $6,000 USD, he will only have to pay $4,000 USD in taxes for the year.

To claim the credit, the taxpayer and the adoption must meet certain eligibility requirements. The taxpayer cannot have an adjusted gross income above a certain threshold. If the taxpayer is married, the couple must file a joint tax return to claim the credit unless one of them qualifies for a special exemption. The adopted child must be a US citizen or resident under 18 years of age or disabled. If the child is from a foreign country, the taxpayer has to wait to claim the credit until the adoption becomes final.

Only certain qualified expenses can be offset using the adoption tax credit. The credit allows the taxpayer to claim reimbursement for adoption fees, court costs, attorney's fees, travel expenses, per diem, and any other expenses that were incurred as part of the legal adoption proceeding. Every time the law authorizing the tax credit comes up for renewal, the lawmakers change the maximum amount of expenses that can be offset. Historically, the expenses threshold has increased at every renewal.

The adoption tax credit is applicable to every child adopted. If a family adopts more than one child, they are entitled to a credit for every child. The credit can be claimed in the year the expenses are incurred or in the year the adoption becomes final. Expenses for failed attempts to adopt are also allowable under the credit.