Learn the Qualifications for Adoption-Related Tax Savings

Adopting a child is a wonderful way to expand a family.  However, the adoption process can be expensive: The average cost of private domestic adoptions ranges from $20,000 to $35,000 and international adoptions range from $25,000 to $50,000, according to Bankrate.com.

The good news is that, if you have recently adopted or attempted to adopt a child, you may be eligible for the federal adoption tax credit, made permanent earlier this year when the American Taxpayer Relief Act of 2012 was signed into law.  For 2013, the maximum credit is $12,970 per eligible child.  This amount begins to phase out if you (or you and your spouse, if you are married) have modified adjusted gross income (MAGI) in excess of $194,580, and is completely phased out for MAGI of $234,580 or more.

The credit covers any necessary adoption costs, including travel expenses, court fees and legal costs.  For you to be eligible, the child must be under 18 years old, with an exception for children with special needs.  The credit applies only to domestic, international and foster care adoptions. Surrogacy and stepparent adoptions do not qualify.

The current credit is nonrefundable, meaning you will not be able to recover the difference if your qualified expenses exceed your tax liability for the year.  However, you can carry forward the excess for up to five years or until you fully use up the credit, whichever comes first.

To claim the adoption tax credit, complete Form 8839, “Qualified Adoption Expenses.” Be aware that, if you are filing Form 8839, you cannot file your income tax return and Form 8839 electronically; you must file a paper return.  Also be aware that taking the credit may increase your chances of an IRS audit.

If you have questions about the qualifications for filling out Form 8839, please contact Peggy Vyborny at [email protected] or call her at 312.670.7444.