What is Adoption Tax Credit?
People who adopt children could enjoy certain tax benefits including adoption tax credit. This is a nonrefundable tax credit, which means for that year you cannot receive any refund even if your credit amount is more than the taxes owed. But the excess could be carried over to future years (up to 5 years). In order to file a tax return, you can include your adoption expenses on Form 8839, then the credit will be automatically calculated and reported on your online tax return record. It is also worth mentioning that the upper limits for receiving adoption tax credit is $14,300 per eligible child in 2020.
Adoption expenses might include adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging), as well as other expenses directly from the adoption. But these expenses will not include the expenses you received under any federal, state, or local program as a gift for adoptions or any expenses against the law.
In order to earn the adoption tax credit, you need to meet several requirements. First, the child needs to be a U.S. citizen or resident (or a U.S. citizen with special needs) by the end of the tax year. If the child has special needs and the state determines that the child not be adopted without assistance, you might then be eligible for an increased tax credit. You also need to demonstrate that you have paid the qualified expense for this child.
Domestic Adoption & Foreign Adoption
You can also claim both domestic adoption and foreign adoption. The former is adoption of an eligible U.S. child while the latter is adoption of an eligible child who is not a U.S. citizen or resident. The two categories are different in the process of claiming. For domestic adoption, qualified expenses paid before the final adoption could be considered as a credit for the tax year following the year of payment (even though the adoption is never finalized). For foreign adoption, you need to finalize the adoption process before getting the adoption tax credits. When you finish the adopting process, qualified adoption expenses paid before and during the year could be counted as a credit for the year.