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Nine Facts About the Adoption Credit

Did you know that adoptive parents may qualify for a tax credit? Parents who either adopted a child or tried to adopt a child may claim the adoption credit. Here are nine things you should know about this credit.

  • Credit. The credit is nonrefundable. This means the credit may only reduce your tax liability to zero. If the credit is more than the tax owed, you cannot receive an additional amount as a refund.
  • Credit carryover. You can carry any unused credit forward to the next year. This happens when the credit is more than the tax owed. In other words, if you have an unused credit in tax year 2017, you can use it to reduce your taxes for 2018. You can carry any remaining credits for up to five years, or until you fully use the credit, whichever comes first.
  • Exclusion. If your employer helped pay for the adoption through a qualified adoption assistance program, you may qualify to exclude that amount from tax.
  • Eligibility. An eligible child is an individual under age 18 at the time the expenses are paid. It can also be an individual of any age who is physically or mentally unable to care of themselves.
  • Special needs child. Special rules apply if you adopted an eligible U.S. child with special needs. You may be able to take the exclusion even if you didn’t pay any qualified adoption expenses.
  • Qualified expenses. Adoption expenses must be directly related to the adoption of the child. The expenses must also be reasonable and necessary. Types of expenses that can qualify include adoption fees, court costs, attorney fees, and travel.
  • Domestic or foreign adoptions. In most cases, you can claim the credit whether the adoption is domestic or foreign. However, the rules for which year you can claim qualified expenses differ between these two types of adoptions.
  • No double benefit. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you can’t claim both a credit and an exclusion for the same expenses.
  • Income limits. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on the amount of your income. Also note that the credit and/or exclusion is not eligible to be claimed if your filing status is married filing separate, but all other filing statuses are eligible.

For any questions, contact Dennis Gallant, CPA, Senior Manager, Tax Services, Thomas Howell Ferguson P.A. CPAs, (850) 668-8100 or dgallant@thf-cpa.com.

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