U.S. Tax Benefits for Foreign Adoptions

November 3, 2021

The best and most important benefit of adoption is the opportunity to provide a loving home for a child who desperately needs your love and care. All other considerations pale in comparison.

But it’s still a good idea to take advantage of every adoption tax benefit you can. There are several potential tax benefits for adoption that may help defray some of the costs. There are also special considerations that apply specifically to foreign adoptions of children from outside the United States.

What Children Qualify for Adoption Tax Benefits?

Generally, these tax benefits
apply only to adoptions of children other than a stepchild. If you’re already married to the adoptee’s parent, you won’t qualify for the adoption tax benefit.

Furthermore, the adopted person must be either under the age of 18 or be physically unable to provide care for himself or herself.

Federal Adoption Tax Credit

Families finalizing an adoption in 2021 may qualify for a tax credit of up to $14,440 per child, depending on their income, and whether the child has special needs. A tax credit is a dollar-for-dollar reduction in federal tax liability. It’s a one-time credit per child, but you can claim the credit again for an unlimited amount of children.

In most cases, the credit amount is based on the reasonable and ordinary expenses incurred that are directly related to and for the principal purpose of the adoption process. These are called qualifying adoption expenses (QAEs).

Examples include legal fees, home study fees, agency fees, and travel expenses. You can also claim amount spent for meals and lodging while away from home. The credit will reimburse you for these expenses you incur that are not reimbursed by anyone else, up to a limit of $14,440 per child.

Special Needs Children
If you adopt a U.S. child with special needs, you can qualify for the full amount of the credit, even if you had no out-of-pocket adoption expenses. However, the special needs tax benefit does not apply to special needs children from outside of the U.S. and its territories and possessions. If you’re doing a foreign adoption, the Adoption Tax Credit amount is limited to the amount of your qualified adoption expenses.

Income limits
To claim the full federal adoption tax credit, you must have a modified adjusted gross income below 216,660. From there, the credit gradually phases out until it reaches zero at MAGI above $256,660, for tax year 2021.

Refundability and Carry-forward provisions
The Federal Adoption Tax Credit is non-refundable. That means the IRS will deduct up to the credit limit from your tax liability for the year, but they won’t add the amount to a tax refund. Effectively, you must have a net federal tax liability before applying the credit to benefit from the credit.

However, you can carry the adoption tax credit forward for up to five future tax years. So if you don’t have a high enough income tax liability in the first year to take full advantage of the tax credit, you can apply the remaining credit amount against future income tax bills until the full credit amount is used up, or five additional years elapses — whichever comes first.

Foreign Adoptions and Claiming the Adoption Credit

Normally, the Adoption Tax Credit is allowable for foreign and domestic adoptions alike. But there are important differences in the timing rules for claiming the credit.

For domestic adoptions, you can claim the adoption credit against expenses you incur in the year before the adoption becomes final. You can also claim the credit to offset these expenses for a domestic adoption even if the adoption is never finalized, and even if a child was never identified for adoption.

For foreign adoptions, however, you must wait until the year the adoption is finalized to claim the credit. You can still claim the credit for expenses in prior years. You just must wait until the adoption is finalized to claim them, and the credit will be applied to your taxes for the current year.

Child Tax Credit

Once you adopt a child, you may be eligible for the Child Tax Credit for that child. The American Rescue Plan Act of 2021 increased the Child Tax Credit as follows:

  • Under age six: $2,000 to $3,600 per child.
  • Age six and up: $2,000 to $3,000 per child

It also increased the age limit from 16 to 17.

You can receive the full Child Tax Credit if you meet the following income limits:

  • Married couples with income under $150,000
  • Families with a single parent (also called Head of Household) with income under $112,500
  • Everyone else with income under $75,000

These people qualify for a Child Tax Credit of at least $2,000:

  • Married couples with income under $400,000
  • Families with a single parent (also called Head of Household) with income under $200,000
  • Everyone else with income under $200,000

Those with incomes above these thresholds may receive a lower credit, or no credit.  Once your adoption is final, you may be able to get monthly advance payments on your child tax credits.  Unlike the Adoption Tax Credit, the Child Tax Credit is fully refundable.

Dependent Child Exemptions

Once you adopt a child, you may be able to list the child as an exemption on your tax return. Generally, children you adopt from outside the U.S. will not have Social Security Numbers. The IRS may also disallow the Adoption Tax Credit if you don’t have a tax identification number or Social Security Number for the child.

If you are adopting a non-U.S. child, you will likely need to obtain an Adoption Tax Identification Number to claim the tax credit and dependent exemptions. The ATIN is a temporary identifier and good for two years, allowing you time to obtain a Social Security number for the child. You’ll get a reminder after 18 months. The reminder will explain how to get an extension, if necessary.

Note: You cannot use an ATIN to apply for the Earned Income Tax Credit EITC. To receive the EITC, the child must have a Social Security Number.

How To Claim the Adoption Tax Credit

Claim the adoption credit, file IRS Form 8839, along with your tax return for the year. For foreign adoptions, you can’t claim the credit until the until the year that the adoption is finalized.

About Abit0s

AbitOs specializes in the unique accounting needs of high net-worth individuals, entrepreneurs, and business owners with international lifestyles as well as for entities doing business in LATAM and across the globe. Our full-service tax, accounting, and legal team has particular expertise in international taxation. We work every day with foreign business owners and corporations to lower their tax bills, maximize after-tax cash flows, or both.

International adoptions can be extremely complicated. In addition to tax issues, international adoptions frequently involve visa issues, health record reviews, examinations of previous divorce history, and the laws and regulations of adoptees’ countries of origin. At AbitOs, our tax and legal professionals are well experienced with both domestic and foreign adoptions, including tax filing and documentation requirements.

f you would like to benefit from our expertise in these areas, or if you have further questions on this Alert, we encourage you to contact us.