Did you adopt or try to adopt a child in 2016? If so, you may qualify for a tax credit! The adoption credit is a nonrefundable tax credit for qualified adoption expenses paid to adopt an eligible child. The credit may also be available for the adoption of a child with special needs, even if you do not have any qualified expenses. Here is everything you need to know and consider at a glance:
Contact our Pittsburgh area Tax Professionals & CPAs today at (412) 931-1617 for more information on the Adoption Tax Credit.
What is the Adoption Tax Credit?
The Adoption Tax Credit is nonrefundable, which means it's limited to your tax liability for the year. However, any credit in excess of your tax liability may be carried forward for up to five years. The maximum amount (dollar limit) for 2016 is $13,460 per child.
If the credit exceeds the tax owed, there is no refund of the additional amount. However, if the credit exceeds the tax owed, taxpayers can carry any unused credit forward. For example, the unused credit in 2016 can reduce taxes for 2017. Use this method for up to five years or until the credit is fully used, whichever comes first.
What are 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), and
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
Are There Income Limits that Affect the Tax Credit?
According to the IRS, the income limit on the adoption credit or exclusion is based on your modified adjusted gross income (MAGI). If your MAGI amount for 2016 falls between certain dollar limits, your credit or exclusion is subject to a phaseout (is reduced or eliminated). For tax year 2016, the MAGI phaseout begins at $201,920 and ends at $241,920. Thus, if your MAGI amount is below $201,920 for 2016, your credit or exclusion won't be affected by the MAGI phaseout, whereas if your MAGI amount for 2016 is $241,920 or more, your credit or exclusion will be zero.
Timing Rules | Domestic vs Foreign Adoption
The tax year for which you can claim the credit depends on the following:
- When the expenses are paid;
- Whether it's a domestic adoption or a foreign adoption; and
- When, if ever, the adoption was finalized.
While the tax credit can be claimed whether the adoption is domestic or foreign, the timing rules will differ, depending on the type of adoption.
- A domestic adoption is the adoption of a child that is a US citizen. Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment. This is the case even when an adoption does not get completed because an eligible child is never identified.
- A foreign adoption is the adoption of an eligible child who isn't yet a citizen of the US before the adoption effort begins. Qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final.
If you have any questions regarding the adoption tax credit, feel free to give our CPAs a call to discuss how your path to adoption can affect your tax preparation.