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Ten Facts about Adoption-Related Tax Savings

Adoption can create new families or expand existing ones. The expenses of adopting a child may also lower your federal tax. If you recently adopted or attempted to adopt a child, you may be eligible for a non-refundable tax credit. You may also be eligible to exclude some of your income from tax.

Here are ten things the IRS wants you to know about adoption tax benefits.

The maximum adoption tax credit and exclusion for 2014 is $13,190 ($13,400 in 2015) per eligible child.

  1. To be eligible, a child must generally be under 18 years old. There is an exception to this rule for children who are physically or mentally unable to care for themselves.
  2. The tax credit is nonrefundable. This means that, while the credit may reduce your tax to zero, you cannot receive any additional amount in the form of a refund.
  3. If your credit exceeds your tax, you may be able to carry forward the unused credit. This means that if you have an unused credit amount for the tax year, you can use it to reduce your taxes for the following year. You can carryover an unused credit for up to five years or until you fully use the credit, whichever comes first.
  4. Use Form 8839, Qualified Adoption Expenses, to claim the adoption credit and exclusion. You can now efile a tax return even when an adoption credit is claimed.
  5. Adoption expenses must directly relate to the legal adoption of the child and they must be reasonable and necessary. Expenses that qualify include adoption fees, court costs, attorney fees and travel costs.
  6. If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you did not pay any qualified adoption expenses.
  7. If your employer has a written qualified adoption assistance program, you may be eligible to exclude some of your income from tax.
  8. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you cannot claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.
  9. The credit and exclusion are subject to income limitations ($197,880-$237,880 in 2014; $201,010-$241,010 in 2015).
  10. The limits may reduce or eliminate the amount you can claim depending on your income.