A family can receive a credit of about $16K per adopted child, under the ATC (Adoption Tax Credit) Act. The federal adoption tax credit is a responsible way to help American households with adopted kids and provide them with financial help. Thousands of families claim this credit yearly to reduce their taxable income. In this article, you will learn more about the federal adoption tax credit offered by the US government and its benefits to American families.
Understanding the Federal Adoption Tax Credit
The adoption tax credit is an initiative by the federal government to cover the tax liability of families with adopted children. In addition to this tax credit, families can claim a child tax credit and tax returns. The adoption tax benefit and federal tax credit can be claimed together in some states. The tax credit only applies to families with income under $279,320 annually. The credit is also not available for families who adopt their stepchildren.
Eligibility Criteria
ATC has certain guidelines that one must meet to get the credit. This includes various eligible expenses and criteria. Here is the list of eligibility criteria for adoption tax credit:
Qualified Adoption Expenses
Taxpayers can claim the credit for reasonable and necessary adoption expenses. It includes adoption fees, court costs, attorney fees, travel expenses, and other expenses directly related to the adoption process.
Modified Adjusted Gross Income (MAGI)
The Adoption Tax Credit, or ATC, has income limitations based on the taxpayer’s modified adjusted gross income (MAGI), which are adjusted annually.
Adoption Process
The adoption process must be completed legally before the taxpayer can claim the tax credit.
Domestic and International Adoptions
The Adoption Tax Credit or ATC is available for domestic and international adoptions.
Special Needs Adoptions
Taxpayers who adopt a special needs child are eligible for the full amount of the Adoption Tax Credit. The special needs child must meet specific criteria for eligibility for adoption assistance and state assistance programs.
U.S. Citizenship or Resident Alien Status
Taxpayers must be U.S. citizens or resident aliens to claim the Adoption Tax Credit.
Qualifying Adoption Expenses
The ATC only covers the qualifying adoption expenses. This expense is totally refundable in the case of a special needs child. Here is a list of expenses that are covered under the adoption tax credit:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Home studies
- Travel expenses
- Meals expenses
- Lodging expenses related to the adoption while away from home
How to Claim the Tax Credit
The adoption is a very lengthy process and requires various documentation. To apply for tax credits, one must keep all documentation and check their eligibility. To claim the ATC or Federal Adoption Tax Credit, follow these steps:
Collect Documentation
Collect all required documentation related to your adoption. This includes expenses, receipts, invoices, legal documents, and adoption agency statements.
Determine Eligibility
It would help if you met the eligibility criteria for the Adoption Tax Credit, which include having incurred qualified adoption expenses, meeting income limits, and finalizing the adoption.
Complete IRS Form 8839
You must complete IRS Form 8839 to claim the Adoption Tax Credit and Qualified Adoption Expenses.
Calculate the Credit
With Form 8839, you must calculate the total amount of your qualified adoption expenses and determine the allowable credit based on your income level.
Attach Form 8839 to Your Tax Return
After completing Form 8839, attach it to your federal income tax return for the year the adoption expenses were incurred. This is typically done when filing your Form 1040 or other applicable tax forms.
Financial Planning for Adoption
Adoption is a responsibility of a lifetime. Most parents and new couples might need help understanding the expenses it brings. Before applying for adoption, one must research and understand the responsibilities thoroughly. You can also consult a financial advisor to determine a specific budget according to your income level so that money is not one of your problems. Here are some tips families can follow for better financial planning for adoptions:
- Review tax coverage for maximum benefits.
- Explore adoption grants and loans
- Create a saving plan to protect your child’s future
- Explore better employer benefits
- Research thoroughly about adoption costs
- Make a budget for at least two years and keep your savings handy
Read related blog: Federal Tax Credit for Wood Stoves
Conclusion
With adoption comes a range of emotions and expenses. Usually, an unplanned child can disrupt your future financial goals, and you might need to prepare for the problems you might face. From vaccinations to education, every bill is yours till the child becomes an adult. Therefore, it is important to use adoption tax credits and explore other grants from the government to ensure your child receives all the facilities it can. With the right strategy, you can provide your child with a better today and tomorrow. Furthermore, check out Beem Tax Calculator to get a quick and accurate estimate of your federal and state tax refund for free.
