Tax Credit For Foreign Adoptions

If your family is interested in claiming the adoption tax credit for a foreign adoption, you need to keep in mind that there are special timing rules that apply for foreign adoptions. These rules differ from the timing rules for domestic adoptions and impact when you may claim qualified adoption expenses.

The Tax Code provides a nonrefundable credit for qualified adoption expenses. The credit is subject to income limitations, which means that some taxpayers may not qualify for it. Generally, the credit covers adoption expenses such as fees, court costs, traveling expenses, and other expenses directly related to the adoption.

The Tax Code also distinguishes between domestic and foreign adoptions. This distinction is important due to timing rules. The IRS has explained that a domestic adoption is the adoption of a U.S. child, an eligible child who is a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment, even if the adoption is never finalized and even if an eligible child was never identified.

A foreign adoption is the adoption of an eligible child who is not yet a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before and during the year are allowable as a credit for the year when the adoption becomes final.

Looking at a specific example for a family that pays qualified adoption expenses of $2,000 in 2015, $3,000 in 2016 and $4,000 in 2017 related to the adoption of a child who is not a U.S. citizen or resident. In this example, the adoption becomes final on September 5, 2017. Because the adoption is foreign and not domestic, this family may claim all $9,000 in expenses on their 2017 federal income tax return.

After an adoption becomes final, qualified adoption expenses paid during or after the year of finality are allowable as a credit for the year of payment, whether the adoption is foreign or domestic. In our example above, let’s say that the family pays an additional $1,000 in qualified adoption expenses in 2018. Then they may claim the additional $1,000 in expenses on their 2018 return.

The adoption credit is just one personal tax preference that could be modified if Congress passes a tax reform bill. Under current law, as described above, there is a distinction between domestic and foreign adoptions.

Please contact your certified public accountant in our office if you have any questions about the adoption tax credit and how it may help offset the expenses of an adoption, whether domestic or foreign.