Adoption Tax Credits and Deductions

Adoption tax credits and deductions are a very useful financial benefit for parents who adopt a child. In Arizona we may see more use of these following Jan Brewer’s (the Arizona Governor) 2013 State of the State Address.

In the address she said, “Arizona’s abused and neglected children need help. The Executive budget I release Friday will add 150 CPS caseworkers and boost foster care, adoption services and emergency placement of children needing rescue. Because these needs can’t wait, I’m asking you to join me in
approving an emergency budget request to hire 50 additional caseworkers right now. Let’s come together for the safety of our children.”

So what are the tax benefits available to parents who adopt a child in Arizona?

These include:

  • Federal Adoption Credit
  • Federal Exclusion For Employer Provided Adoption Benefits
  • Arizona Deduction For Adoption Expenses

If you live in another state they may have a similar deduction like the one for Arizona.

If you are planning on adopting a child I would recommend that you consult with your tax preparer before starting the adoption so that you fully understand the credits and deductions available. They will also be able to let you know what records and documents you need to retain to support your claim.

Federal Adoption Credit

This is the one that most people will claim and is claimed on form 8839. It is a non-refundable credit for up to $12,970 (2012-$12,650) of adoption expenses. Non-refundable means that you can only use so much of the credit as covers your tax liability. Any balance of the credit that you can’t use is carried forward for up to 5 tax years to use against the tax liabilities in those years. So, you are likely the see the benefit in reduced tax bills over several years. Note, that the credit is phased out if your adjusted gross income (AGI) is more than $194,580 (2012-$189,710) and cannot be claimed if your AGI exceeds $234,580 (2012-$229,710).

One very beneficial aspect of the credit is that if you adopt a special needs child you can claim the full credit even if you did not pay any adoption expenses. There are several conditions that determine if a child is a special needs child which revolve around the State determining that a child is a special needs child.

The adoption credit can be claimed for both US children and foreign children. The major difference between the two is that for adopting foreign children you can only claim the credit when the adoption becomes final. For US children you can claim the credit as the adoption progresses and even if the adoption never becomes final.

There are various definitions about who is a qualifying child to claim the adoption credit and which expenses qualify. Your tax preparer can advise you whether your child and expenses qualify.

Federal Exclusion For Employer Provided Adoption Benefits

If your employer has a written adoption assistance program then you may be able to exclude from your income the same amount of adoption expenses as is allowed for the adoption credit. In certain circumstances you may be able to exclude an amount from your income and also claim the adoption credit. This part of the claim can get complicated, so if this applies to you I would recommend you get tax advice before commencing the adoption.

Arizona Deduction For Adoption Expenses

If you are filing an Arizona tax return you can claim a deduction against your income for the lesser of your total qualifying adoption expenses and $3,000. The deduction can only be claimed in the year the adoption is final. There is no deduction if you did not incur any adoption expenses.

2010 and 2011 Refundable Adoption Credits

In 2010 and 2011 the maximum credits were slightly higher than they are now. More importantly they were refundable which meant that you did not need to carry forward any unused credit. The unused amount was repaid to you.

If you adopted a child or were in the adoption process in 2010 and 2011 make sure that you have filed your adoption claim on form 8839 to get any refund due to you. The deadline for claiming a 2010 tax refund is April 15, 2014 and for a 2011 tax refund it is April 15, 2015.

Disclaimer – This article does not constitute personal tax advice to the reader and is only offering general information. You should seek professional advice for your own situation as the most appropriate tax planning depends on your personal and unique circumstances.

Posted By Mark Smith

Mark Smith, RTRP is a Registered Tax Return Preparer and accountant with over 29 years tax and accounting experience. He is the owner of Cranmere Accounting and Tax Services LLC. He can be contacted on (480) 363-4808 or by email at if you need assistance with claiming your adoption credit.

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