Now that 2019 is officially underway, it is time for families who finalized their adoptions in 2018 to take advantage of the 2018 Federal Adoption Tax Credit. Prospective adoptive parents can find information about the Federal Adoption Tax Credit on the IRS website. Basically, this provision allows adopting parents to take a tax credit for “qualified expenses” to adopt a child. “Qualified adoption expenses” are reasonable and necessary adoption fees, court costs and attorney fees, traveling expenses (including meals and lodging), and other expenses directly related to the adoption. A tax credit is different from a tax deduction; it is better. A credit is an amount that is subtracted from the adopting parents’ tax liability. The maximum available tax credit for 2018 is $13,810.
The precise amount of the tax credit depends on the expenses incurred and the amount of taxes owed by the adopting parents. For example, if the adopting parents spent $10,000.00 in recoverable adoption costs but owe only $7,000.00 in federal taxes, they can take a tax credit for only $7,000.00 in the first year following the adoption. But they may carry forward the unused credit for five tax years or until it is used, whichever comes first. In a different scenario, if the adopting parents owe $30,000.00 in federal taxes in one year and pay $10,000.00 in recoverable adoption costs that same year, they can claim the full $10,000.00 tax credit, thus reducing their tax liability to $20,000.00.
For the adoption of a child with special needs the adopting parents may claim the entire available tax credit even if they have not expended that amount of money in adoption expenses. This is especially helpful for foster parents who adopt through the DSS system, where the children will often have special needs and the adoptive parents probably have few if any expenses that fit the definition of a “qualified adoption expense.”
An important limitation on the Federal Adoption Tax Credit is the income cap. Under the 2018 formula, adopting parents who earn no more than $207,140.00 are entitled to take the full credit. For adopting parents who earn between $207,140.00 and $247,140.00 in income, there is a reduced tax credit, and no tax credit is available for those earning more than $247,180.00.
For families hoping to adopt in 2019, the Federal Adoption Tax Credit for next year has already been announced. The maximum available tax credit for 2019 is $14,080 for families who earn under $211,160 during the year. The tax credit is not available to families who earn a gross income of more than $251,160.
Have questions about this announcement? Please contact the Law Offices of James Fletcher Thompson in either Charleston or Spartanburg and we would be happy to help.