Hey guys, it’s Bette Hochberger, CPA, CGMA, and to kick off Pride Month, we’re bringing you a special tax tip Tuesday. On this one, we are going to go over the adoption tax credit. Now, obviously, the adoption credit applies to anyone who adopts a child. It is not strictly for the LGBTQ plus community. It applies to everyone, but the LGBTQIA+ community does tend to make good use of the adoption tax credit, so I wanted to do a high-level overview of the credit.
Now, this will not go into every detail, but I want you to have a general idea of what the adoption tax credit entails and know the basic ins and outs of it. If it’s something you think might apply to you or you might be able to use, you’ll be able to take advantage of it.
First off, what is a tax credit? A tax credit is not a deduction. It’s a little bit different. It is a literal dollar-for-dollar reduction of your taxes, but this particular credit is non-refundable. What does that mean? Well, if you only have a total of $2,000 in taxes that you owe and you have 5,000 of the adoption tax credit, you can only take your tax down to zero. You cannot generate a refund based on this credit, but you can carry it forward, so if you don’t use some part of it, you can roll it forward, use it the following year.
Now for 2020, right? I know 2020 was last year, but that’s the tax year we’re filing for right now. In 2021 is for 2020, the total credit was 14,300, but there is an income limitation. Like so many things in taxes, it depends on how much you make. That can cause you to phase out of those credits. It’s based on MAGI. We call it MAGI. It’s modified adjusted gross income. The M does not apply to a lot of people. You can think of it as your adjusted gross income unless you have a really complex tax situation. But basically, once you hit $214,520, you’re going to start phasing out that adoption tax credit, and that goes up to 254,520. Once you hit that level, there’s no more credit for you, unfortunately.
What do you do with this credit? How do you figure it out? What’s the timing? Anybody who’s adopted a child or has tried to go through that process knows that it’s not fast, right? This can take years. Sometimes it works. Sometimes it might not work. And there’s a little bit of leeway here for this tax credit. You have to think about a couple of different things. When when the expenses paid, right? Is this a domestic adoption or a foreign adoption? And is it ever finalized, right? There are some things that you’re going to have to consider when you’re looking at this.
Also, what kind of costs can you cover? Lots of legal fees, right? There are court costs, attorney fees. All those kinds of fees qualify, anything that they consider reasonable and necessary, which is very vague, but common in the tax world, traveling expenses, so think meals, hotels, things like that, and anything else that’s directly related to the adoption, like maybe a home study, things like that.
What else? Domestic adoptions. Let’s start there. Timing, right? When are the expenses paid? Well, you might have started an adoption process in 2020, and maybe it didn’t finish then, right? Whatever expenses you had in that year, so for 2020, you can claim them right now when you’re filing your 2020 taxes. You can claim the credits now, even if you did not finish that adoption in 2020, even if it’s an ongoing process, and even if it doesn’t work out in the end.
Now, if it’s a foreign adoption, it’s a little bit different. It’s foreign when the child is not a US citizen, doesn’t have citizenship or residency. That’s all going to qualify all those expenses in the year the adoption becomes final. It’s a little bit different. Some rules are a little different if you have a child that you’re adopting with special needs. I’m not going to go into too much of that, but it does change things a little bit differently.
I think that’s most of it. It’s not the easiest thing in the world to calculate this. There are a lot of costs, but it’s a pretty sizeable tax credit. If it is something that you can take advantage of, I highly recommend you do it. Adoption’s a crazy emotional roller coaster of a process, but at least you can get some tax breaks out of it. And I think that’s it. If you’ve got any comments, questions, et cetera, drop them in the comments below, shoot us alike, and if anyone might find this information helpful, obviously, please share it out. Thanks so much, and we’ll see you next time.
