Adoption credit situation

[meehir007]

My wife and I are looking to adopt a domestic US-born child. We haven’t identified a child yet, but we are hopefully we will identify and adopt a child soon. So far, we have incurred adoption related expenses in 2023 and 2024.

We started the adoption journey in Jan 2023. We have incurred approx. $8K of adoption expenses in 2023 and approx. $4K of adoption related expense so far in 2024.

Question:

• can we deduct the expenses and/or receive the adoption credit for 2023?
• can we deduct the expenses and/or receive the adoption credit for 2024?
• Could the credit be taken away by the IRS if we never identify a child or finalize adoption?
• Looking at my tax situation for 2023, I expect to receive a small refund for 2023. Will I receive the adoption credit as a refund for 2023?
• What other things do I need to know about adoption credit?

Thanks!

[Katie-P · Accepted solution]

Hi @meehir007,

Thanks so much for your great questions! I'm happy to help.

1. Since 2023 was the first year you incurred qualified adoption expenses for a domestic adoption, you would not be allowed to take the adoption credit in tax year 2023.
2. On your 2024 tax return, the $8k you paid in 2023 would be eligible to be considered as an adoption credit. If you finalize the adoption in 2024, you would also be eligible to use the $4k of qualified adoption expenses paid so far in 2024.
3. The credit cannot be taken away by the IRS if you and your wife never identify a child or finalize the adoption.
4. The adoption credit is non-refundable, which means that it can reduce your tax liability down to zero, but it cannot give you a refund above and beyond that. But the good news is that the adoption credit carries forward for up to five years, thus increasing the likelihood that you could eventually take the credit. 
5. Here are some resources for you:

•  https://www.irs.gov/taxtopics/tc607 
• https://turbotax.intuit.com/tax-tips/family/new-addition-adoption-tax-credits/L69hPmzJB 

I hope this information is helpful! I'll stay tuned in case you have any follow-up questions. Thanks so much and best wishes to you and your wife on the adoption!

[meehir007]

Hi @Katie-P,

WOW! Thank you very much for your quick response.  I do have a couple of follow-up questions please. 

In reference to your response to # 4, my wife and I received W2 from our employer.  In addition to the regular tax withholding, we both have additional tax withheld from our paychecks to avoid a larger tax bill at filing.  That said, would it be advisable to discontinue additional withholding to create a larger tax bill? The thought is the adoption credit would offset any tax due at the time of filing. In short, my preference would be to get the credit sooner and not have it carried forward into later years.

Will the following classify as qualified adoption expenses? There isn’t much info on these expenses at the IRS site.

• Adoption consulting fee (a fee paid to a pro adoption consultant)
• Travel cost to see adoption consultant, ticket cost to attend a retreat offered by the consultancy agency. Retreat focused on adoption related education and live panels with birthmother, therapists, and other topics related to adoption.
• Home study related expenses such as state background checks, fingerprinting, Medical/Lab test fees.
• Fees related to educational courses which are often a prerequisite for applying with an adoption agency.
• Fees from multiple adoption agencies. For example, we are currently active with three agencies that will send us situations as appropriate.
• Fees to renew home study.

Thank you!

[Katie-P]

Hi again @meehir007, thanks for your follow-up questions.

I'd like to explain about the withholding. Whether you change your tax withholding to $0 or increase it to $1 million, it does not impact how much income taxes you and your wife are assessed when it comes time to filing your return. The withholding is just a mechanism by which to pay the IRS all year long. Increasing it or decreasing just changes the amount you'll either end up owing or being owed. So if you paid in $20k in federal withholding from your paychecks all year, and your tax liability was $25k, you are going to owe $5k in income taxes. If you increased your withholding and paid in $26k all year, your tax liability is still $25k, and now you'll be owed a refund of $1k. 

Let's say that you finalize the adoption in 2024. So the total qualified adoption expenses you'll be able to use on the 2024 return will be $12k. Let's say that your tax liability before considering the credit was the $25k I mentioned above, and that you paid in $26k of withholding all year. Your refund would then be $13k. Your total tax was always $25k; your total payments and credits equal $38k ($26k in withholding plus the $12k adoption credit). The difference is $13k. You don't come out ahead by giving the IRS more money than they are owed all year long. You may have heard about people giving an interest-free loan to the IRS via their tax withholdings. This scenario is what they are talking about. 🙂

If you want to use the credit up in one or two years, then you just need to make sure that your tax liability is enough to absorb the credit. One way you could increase your tax liability would be to do a Roth conversion. Or if you normally contribute to a traditional IRA, consider switching it up and contribute to a Roth IRA instead.

Here's what the IRS has to say about Qualified Adoption Expenses (reference this link: Instructions for Form 8839 (2023):

Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.

Qualified adoption expenses include:

• Adoption fees,

• Attorney fees,

• Court costs,

• Travel expenses (including meals and lodging) while away from home, and

• Re-adoption expenses relating to the adoption of a foreign child.

Qualified adoption expenses don't include expenses:

• For which you received funds under any state, local, or federal program;

• That violate state or federal law;

• For carrying out a surrogate parenting arrangement;

• For the adoption of your spouse's child;

• Reimbursed by your employer or otherwise; or

• Allowed as a credit or deduction under any other provision of federal income tax law.

All of the adoption expenses that you laid out would seem to be reasonable and necessary in the eyes of this CPA. I hope this helps!

[meehir007]

Hi @Katie-P ,

Thank you once again for your time and expertise. I am in a good spot for now.

Have a blessed day!

[meehir007]

Hello again @Katie-P ,

I have one more question please.  The adoption credit  is $15,950 in 2023 and increases to $16,810 in 2024.  Since I will receive the adoption credit when filing for year 2024(for expenses incurred in 2023),  what is the max amount we could receive,  $15,950  or  $16,810?

Thanks!

[Katie-P]

Hi @meehir007,

You ask great questions! The higher amount of $16,810 would apply.