When you adopt a child, you could bring home more than a bundle of joy. You may also be in line for a valuable tax credit.
For 2019, a tax credit of up to $14,080 per special needs child can come in handy for parents facing the daunting costs of adoption (up from $13,810 in 2018). For other adoptions the credit is equal to the qualified adoption expenses, up to $14,080.
Experts estimate the entire process can set you back as much as $25,000. Here are the details of this tax break:
Qualifying expenses. The credit can be used for each child you adopt, in the United States or abroad. To be eligible, the IRS requires the expenses to be "reasonable and necessary" for adoptions of children under age 18. They include court costs, attorney fees and travel expenses.
Some expenses are not eligible. The IRS specifically excludes some outlays, such as those paid for a surrogate parenting arrangement and the costs incurred to adopt your spouse's child. And if you're remarried, you can't claim the credit for adopting the child of your new spouse.
The value of a credit. If you qualify, the adoption credit can reduce your tax liability on a dollar-for-dollar basis. This is much more valuable than a deduction, which only reduces the amount of income subject to tax. This credit phases out subject to the taxpayer's modified adjusted gross income (MAGI). The credit begins to phase out at MAGI of $211,160 and completely phases out when MAGI reaches $251,160. (For 2018 the phase out range was $207,140 to $247,140.)
Double bonus. If you're fortunate enough to have an employer who pays for adoption expenses, some or all of money could be tax-free. You can get the benefits of both the tax credit and the income exclusion for the same child as long as they're not claimed for the same expenses.
For more information on the subject, consult with your tax adviser. You can also get a free copy of IRS Publication 968, Tax Benefits for Adoption by calling 1-800-829-3676 or visiting the IRS Web site at http://www.irs.gov/.