Adoption is an excellent way to grow a family, as well as give a child in need a home. However, sometimes the process is prohibitively expensive. In the United States, the average cost of a private agency adoption equals $43,000. There are numerous expenses that go into the process, such as court fees, attorney fees, travel expenses or home studies.
Thankfully, the IRS makes it easier for families to cover these fees along with other qualifying expenses. You just have to use the federal adoption tax credit.
Some tax credits are refundable. That means the IRS will pay you even if you don’t owe any tax. But most are non-refundable, and all they can do is to reduce your tax liability to $0.
While the adoption tax credit is non-refundable, it still can be carried forward up to five years. It means that if you have a $5,000 credit but can use $3,000 of it your first year, you will get four more years to use up the remaining $2,000.
Not all adoptions qualify for the adoption tax credit. If you want to get that credit, you must adopt a child under the age of 18. However, both domestic and international adoptions count, and you can adopt a child via the foster care system or a private agency. There is one more stipulation, though, adopting a stepchild doesn’t render a person eligible for this credit.
What is the adoption tax credit’s worth?
The adoption tax credit could be worth up to $14,300 in 2020. However, its value increases to $14,440 in 2021. If you want to claim the maximum credit, you need to gather the same amount in eligible expenses. Adoption sometimes becomes a multi-year process. So, for domestic adoptions, you can claim the adoption tax credit for the tax year in which you had to pay expenses.
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