Hi, I’m Bette Hochberger, CPA, CGMA. For today’s throwback Thursday, as well as the start of Pride Month, I will discuss adoption tax credits. The adoption credit is available to everyone who adopts a child, not just the LGBTQ+ community. However, the LGBTQ+ community often takes advantage of this tax credit, so let’s take a closer look at it.
Now, I won’t get into all the nitty-gritty details, but I want to give you a good grasp of the adoption tax credit. Understanding the basics will help you determine if it could benefit you and allow you to make the most of it.
What is Tax Credit?
A tax credit is a special benefit given by the government to help people or businesses lower the amount of money they have to pay in taxes. It’s different from a tax deduction because a tax credit directly reduces the amount of tax you owe, dollar for dollar.
For example, if you have a $500 tax credit, you can subtract $500 from the total taxes you have to pay. Tax credits can apply to different things, like adopting a child, buying energy-efficient appliances, or using renewable energy. By taking advantage of these credits, you can potentially pay less in taxes and keep more money in your pocket.
Adoption Tax Credit
Now, let’s dive into the exciting world of tax benefits for adoption! You can receive the rewards of both a tax credit and an income exclusion when you adopt an eligible child. The tax credit covers qualified adoption expenses you’ve paid, while the income exclusion applies to adoption assistance provided by your employer.
Here’s the catch: the credit is nonrefundable, meaning it’s limited to your tax liability for the year. But don’t worry; any excess credit can be carried forward for up to five years, giving you future opportunities to utilize it. The maximum amount, or dollar limit, for 2022 is an impressive $14,890 per child.
But with this tax credit, you must think about what you do with it, how you figure it out, and the timing. If you’ve ever gone through the adoption process, you know it’s not a speedy journey, right? It can take years, and sometimes things work out, while other times they don’t.
Qualified Adoption Expenses
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Traveling expenses (including amounts spent for meals and lodging while away from home
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child
Now, who exactly is considered an eligible child? Well, an eligible child can be someone under the age of 18 or an individual who is physically or mentally incapable of self-care.
Also, qualified adoption expenses don’t cover taxpayers’ costs to adopt their spouse’s child. However, there’s an exciting twist: if you’re a registered domestic partner living in a state that allows same-sex second parenting or co-parenting, you can still qualify for the credit by paying qualified adoption expenses for your partner’s child.
The adoption credit and exclusion have income and dollar limitations. Your modified adjusted gross income (MAGI) determines if your credit or exclusion will be reduced or eliminated. For 2022, the phase-out range is $223,410 to $263,410. If your MAGI is below $223,410, there is no impact on your credit or exclusion. Your credit or exclusion will be zero if your MAGI is $263,410 or higher.
The tax year for which you can claim the credit depends on the following:
- When the expenses paid fully
- Whether it’s a domestic adoption or a foreign adoption
- When, if ever, the adoption finalized.
Typically, the adoption credit is available for both domestic and foreign adoptions. However, the rules regarding when you can claim the credit for qualified adoption expenses vary depending on the type of adoption.
Domestic adoption refers to adopting a child in the United States who is either a U.S. citizen or resident. You can claim qualified adoption expenses as a credit in the tax year following the payment, regardless of whether the adoption is eventually complete or if you haven’t identified an eligible child.
A foreign adoption involves adopting a child who is not a citizen or resident of the U.S. or its possessions before the adoption process starts. If you pay qualified adoption expenses before and during the year of the adoption, you can claim them as a credit in the same year when the adoption becomes final.
So, that’s it for today’s throwback Thursday. I hope you learned something new, and as always, stay safe, and I will see you next time.