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Big Tax Break for Adoptive Parents
Article Highlights:
- Qualifying Adoptions
- Credit Amount
- Credit Carryover
- Qualifying Expenses
- High-Income Credit Phase-out
- Employer Adoption Assistance Program
- Failed Adoptions
- Foreign Adoptions
This is a 1:1 credit, meaning $1 of credit for each dollar of qualified expenses up to a specified maximum for the year, which is $14,300 for 2020 (up from $14,080 in 2019). The credit is nonrefundable, which means it can only reduce tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be used for up to the next five years to reduce future tax liability.
Qualified expenses generally include adoption fees, court costs, attorney fees and travel expenses that are reasonable, necessary and directly related to the adoption of the child. These expenses qualify for both domestic and foreign adoptions. When adopting a child with special needs, the full credit is allowed whether or not any qualified expenses were incurred. A child with special needs is, among other requirements, a child who the state has determined (a) cannot or should not be returned to his or her parents’ home, and (b) a child who won’t be adopted unless assistance is provided to the adoptive parents.
The credit is phased out for higher income taxpayers. For 2020, the AGI phase-out threshold (computed without foreign-income exclusions) is $214,520, and at the AGI of $254,520, the credit is completely phased out. Unlike most phase-outs, this one is the same regardless of filing status. However, the credit cannot be claimed by taxpayers using the filing status married filing separately.
If your employer has an adoption assistance program, up to $14,300 of reimbursements by the employer are excludable from income. Both the tax credit and the exclusion may be claimed, though not for the same expenses.
Failed Adoption - Qualified adoption expenses paid or incurred in an unsuccessful attempt to adopt an eligible U.S. child before successfully finalizing the adoption of another eligible child count for this credit. Unsuccessful and successful adoption attempts are treated as one effort for each eligible child for the purposes of the dollar limit on the credit.
Foreign Adoption - For a foreign adoption, the credit is allowed only in the year the adoption becomes final, and no credit is allowed if the adoption doesn’t become final.
Adopting a Spouse’s Child - Expenses related to adopting a spouse’s child are not eligible for this credit or for an employer’s adoption assistance program.
If you think you qualify for this credit or are planning an adoption in the future, please contact this office for further credit details and to find out how this credit can apply to your particular circumstances.
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Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
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Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
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