Understanding the 2023 Adoption Tax Credit

In 2023, adoptive parents can qualify for a federal adoption tax credit, which acts as a refund depending on how much taxes they owe. Every year, around 135,000 children and adolescents are adopted. Before you complete the adoption proceedings, you should know if you qualify for this year’s adoption tax credit.

Federal Adoption Tax Credit

The adoption tax credit is designed to help families reduce some of the costs associated with completing any type of adoption. To obtain this year’s tax credit, the money must be claimed on next year’s tax return. A person’s financial situation determines how much money they’ll receive when claiming the credit. The highest available amount for every eligible child is $15,950. If the adoption was finalized in 2022, the credit is $14,890.

The limits placed on the tax credit are based entirely on the modified adjusted gross income you accrue during 2023. If your income is higher than $279,230, you can’t claim the full credit. However, a lower amount of this credit is available if you make anywhere from $239,230 to $279,230.

How This Credit Works

The tax credits you receive are mainly based on the qualified adoption expenses you’re tasked with spending. These expenses mainly include:

• Agency fees
• Legal fees
• Travel
• Adoption court fees
• Meals during your travels

If you owe $8,000 in taxes and receive a tax credit of $10,000, you will have $2,000 left over for the future. In the event that the child has special needs or is adopted directly through the government, the total credit is provided without taking expenses into account.

Claiming the Credit

These tax credits are meant to be claimed during the year that the adoption is completed. The types of documents that people might require when filling out their tax forms include:

• Adoption agency placement agreement
• Child’s social security number
• Court documents
• Adoption decree

Since your child’s Social Security Number is necessary, it’s not possible to claim this credit before the adoption is finalized.

Is the Credit Always Available?

There are several additional considerations that might apply when you’re trying to claim the credit. If the adoption is eventually unsuccessful, the tax credit is still available. Expenses that build up when attempting to adopt a child can be reimbursed. However, this benefit doesn’t apply to international adoptions. In this scenario, the adoption must be successfully completed.

Adoptive families that wish to claim the adoption tax credit can fill out IRS Form 8839 to do so. When a married couple tries to claim this credit, they usually need to file a joint return. When filing separately, specific requirements need to be met before claiming the credit. Call our New Jersey adoption lawyer today if you have questions about these requirements.

What Happens When Expenses Are Higher Than Liabilities?

Tax credits can either be refundable or used as an actual credit on your taxes. When a credit is refundable, the amount of the credit that exceeds your tax liability will be provided to you as a refund once you’ve submitted your tax return. Since the federal adoption tax credit is considered a real credit, it can only be used to reduce the tax liability you have.

Let’s say you owe $10,000 for the year but are eligible for a tax credit of $13,000. The refund you receive will cover the $10,000. However, the remaining $3,000 doesn’t just disappear. When the adoption tax credit is higher than the tax liability, it can be moved forward for as long as five years. In this scenario, the remaining $3,000 could be put toward your next tax return.

What Employer Reimbursements Involve

Some employers have adoption benefit programs that employees can gain access to. These programs often reimburse some of the adoption expenses, which can then be excluded from the income you report on your tax credit. Any benefits you receive from this program are tax deductible. Employer contributions often range from $5,000-$25,000.

Even when someone receives this exclusion, they’re able to claim the tax credit for any remaining adoption expenses. However, the tax credit can’t be used for the same expenses that were excluded by your employer.

Whether you seek a private adoption or agency adoption, the process of adopting a child can be a lengthy one. With legal assistance, you can obtain counsel throughout the entire adoption process. Call our New Jersey adoption lawyer Donald Cofsky today at (856) 429-5005 to schedule your first appointment.