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Nine Facts About the Adoption Credit

IRS Tax Tip 2018-05, January 10, 2017

Adoptive parents around the country 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 a taxpayer’s tax liability to zero. If the credit is more than the tax owed, the taxpayer can’t receive an additional amount as a refund.
     
  • Credit carryover. Taxpayers can carry any unused credit forward to the next year. This happens when the credit is more than the tax owed. In other words, taxpayers who have an unused credit in tax year 2017 can use it to reduce their taxes for 2018. Taxpayers can carry any remaining credits for up to five years, or until they fully use the credit, whichever comes first.
     
  • Exclusion. If the taxpayer’s employer helped pay for the adoption through a qualified adoption assistance program, the taxpayer may qualify to exclude that amount from tax.
     
  • Eligibility. An eligible child is an individual under age 18. It can also be an individual of any age who is physically or mentally unable to care for themselves.
     
  • Special needs child. Special rules apply to taxpayers who adopted an eligible U.S. child with special needs. The taxpayers may be able to take the exclusion even if they 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, taxpayers can claim the credit whether the adoption is domestic or foreign. However, the rules for which year a taxpayer can claim qualified expenses differ between these two types of adoption.
     
  • No double benefit. Depending on the adoption’s cost, taxpayers may be able to claim both the tax credit and the exclusion. However, they can’t claim both a credit and exclusion for the same expenses.
     
  • Income limits. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount a taxpayer can claim depending on the amount of their income.

More Information:

Topic Number: 607 - Adoption Credit and Adoption Assistance Programs
Form 8839, Qualified Adoption Expenses
Interactive Tax Assistant: Adoption Credit