Understanding the Adoption Tax Credit

While Americans have a very positive view of adoption, a majority describe private adoptions as either expensive or very expensive.¹ The Adoption Tax Credit (ATC) can help offset the cost and fees of an adoption process. But it is essential that prospective adoptive parents understand the basics of the credit before they can determine how much it can help them.

In this updated guide to understanding the adoption tax credit, we explain what the ATC is, how it is different from a tax deduction, how it works, and what the eligibility and qualifying expenses are. We also discuss proposed legislation to improve the ATC’s ability to help more families and strengthen opportunities for more children to thrive in permanent, loving families.

Note: This information is provided for general educational purposes and is not meant as tax advice. This is a general summary and does not cover each family’s unique situation. Consult a competent tax adviser for individual advice regarding your own situation.

A Brief Legislative History of the Adoption Tax Credit

The adoption tax credit first became available to American taxpayers following the passage of the Small Business and Job Protection Act of 1996.² This was due, in no small part, to the advocacy of National Council For Adoption³ and other advocates seeking to make adoption more affordable for families. Beginning in 1997, the credit was up to a maximum of $5,000 for qualifying families, and has been repeatedly expanded in subsequent years. The Economic Growth and Tax Relief Reconciliation Act of 2001 expanded and extended the adoption tax credit until 2010.⁴

In 2010, two laws were passed impacting the adoption tax credit. The Patient Protection and Affordable Care Act both increased the credit and made the credit refundable (for years 2010 and 2011).⁵ The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the credit, but ended the modifications made by the Affordable Care Act (including an end to refundability of the credit in 2011).⁶
The American Taxpayer Relief Act of 2012 made the adoption tax credit a permanent part of the tax code.⁷ Though the tax code changed dramatically in 2018, the adoption tax credit was preserved.⁸

Qualifying for the Adoption Tax Credit

• You qualify for the ATC if you adopted a child (unless it is a spouse’s child) and paid out-of-pocket expenses relating to the adoption. The amount of the tax credit you qualify for is directly related to how much you spent on adoption-related expenses. Income can also be excluded as taxable through an employer-provided adoption benefit program. Both a credit and exclusion may be claimed for the same adoption; however, both cannot be claimed for the same expenses.
• If you adopt a child with special needs through foster care, you may be entitled to claim the full amount of the adoption tax credit. Each state has different criteria that qualify a child as special needs and eligible to claim the tax credit. The special needs declaration must come from the state in which the adoption was final. The “subsidy agreement” has the determination of special needs that the IRS accepts. Some states call it the “adoption eligibility assistance determination.” (Learn more about subsidies here.)
• Intercountry adoptions are not considered special needs for IRS purposes, so for these families the credit is for the amount of qualified expenses only.
• There are eligibility restrictions based upon taxpayers’ modified adjusted gross income (MAGI). For example, in tax year 2021, the MAGI phase-out begins at $216,660 and ends at $256,660.⁹ The adoption tax credit limitations and restrictions change on an annual basis and should be referenced through IRS publications.

How the Adoption Tax Credit Works

• When filing their tax return, an adoptive family can apply this credit toward their federal tax liability, which can reduce what the family owes in federal income tax.
• The difference between your tax liability and your federal withholding is either what you get as a refund or what you owe when you do your tax return. For those who are eligible, the adoption tax credit covers your tax liability up to the maximum amount of the credit. You will get your withholding back if tax liability is less than the maximum credit amount.
• To claim the adoption tax credit, you must file IRS Form 8839,¹⁰ which includes specific information about the child by adoption.¹¹
• If the child by adoption does not have a social security number yet, the filer can use an adoption taxpayer identification number (ATIN).¹²
• If you do not use all of the credit in the first year, you can carry it forward for up to five years.

Guidelines for IRS Documentation

Taxpayers who claim the adoption tax credit should keep, at a minimum, the following documentation in case they are audited by the IRS:

• Adoption Assistance Eligibility Determination (Subsidy Agreement) that declares the child special needs, if claiming credit for a child declared special needs by your state through foster care (applicable to adoptions from foster care).
• A home study/placement agreement completed by an authorized placement agency (for all types of adoption except adoptions from foster care).
• All documentation of paid qualified expenses (for all types of adoption except those domestic adoptions qualifying as special needs by IRS).
• Final Judgment of Adoption (for all types of adoption).

All documents must be signed and dated (for all types of adoption). The IRS will not accept home studies, placement agreements, judgments of adoption, or subsidy agreements/eligibility agreements unless they have been signed and dated by the proper authorities.