If you’ve been considering adopting a child or a disabled person in Pennsylvania, there are some things you need to be familiar with, including qualified adoption expenses, the adoption credit and the resulting tax savings. Understanding them can make the process easier while helping you avoid undesirable surprises.
What do qualified adoption expenses mean?
These are the costs that you have to incur while adopting a child who’s below 18 years old or someone who needs your care. In the United States, the IRS considers qualified adoption expenses, or QAE, those that are necessary in the adoption process, including attorney fees and court costs. You can claim an adoption credit for these expenses.
You may qualify for the adoption credit if you paid QAE to adopt a child who’s a citizen of the U.S or a U.S. resident. If you paid QAE for the adoption of children from another country, you may also qualify.
Is there a limit to the adoption credit?
In 2022, the maximum credit amount you will access per child is $14,890. Note that to save in tax, your total tax will have to be at least as much as the credit. If the total money you spend on the qualified adoption expenses is higher than your total annual tax, you won’t enjoy any savings for the excess amount. Also, in 2022, you will qualify for the entire allowable credit if your modified adjusted gross income is less than or equal to $223,410.
If you’re eligible, you’ll need to provide the details necessary to claim this credit on your federal tax returns. Besides providing the full name of the child you’re adopting, you’ll need to provide the identifying number and say whether the child has any special needs. To do this, you’ll have to use the IRS Form 8839.
More about taxes
You should note that this tax credit is nonrefundable, but the authorities can carry it forward up to five years. Therefore, this credit has little value to a family that pays very little or zero income tax.
Many adoptive families that pay qualified adoption expenses enjoy the adoption tax credit. Even if you don’t believe that you will use any of this credit within the first year, you should still consider including the IRS Form 8839.