Adoption Tax Credit 2018 Guide

Dawn Davenport


As we put the old year to rest and begin the new our thoughts turn to taxes. And if you have adopted recently your thoughts should be turning to how to maximize the Adoption Tax Credit 2018.

Adoption Tax Credit 2018


We asked Becky Wilmoth, Enrolled Agent and Adoption Tax Credit Specialist at Bills Tax Service, to provide an introductory guide to the Adoption Tax Credit 2018. If you need more detailed information, check out our one-hour online course, which provides specific information on all aspects of the Adoption Tax Credit 2018.


It is very important that families understand that the Adoption Tax Credit can be an important part of helping them adopt whether they are adopting through the foster care system, domestically, or internationally. Adoption is changing–international adoptions have declined and the number of children in foster care has increased, but the one thing that has remained constant is the need for families who are adopting or thinking about adopting to understand the financial resources available, especially the federal Adoption Tax Credit.

An adoptive family can apply the Adoption Tax Credit toward their federal tax liability when they file their tax return. Meaning, it can reduce what they owe in federal income taxes for the year. It is not a refundable tax credit at this time; however, it is still alive, permanent, and a great credit at $13,810 for 2018. It will not, however, cover self-employment tax, early pension distribution penalty, or first-time homebuyer payback.

Who qualifies for the Adoption Tax Credit 2018?

You qualify for the Adoption Tax Credit if you adopted a child (except your spouse’s child) and paid out-of-pocket expenses relating to the adoption. The amount of the tax credit you qualify for is directly related to how much you spent on adoption-related expenses. Income can also be excluded as taxable through an employer-provided adoption benefits program. Both a credit and exclusion may be claimed for the same adoption; however, both cannot be claimed for the same expenses.

What Expenses are Covered Under the Adoption Tax Credit?

Qualified Adoption Expenses are allowed under the Adoption Tax Credit and include any expenses necessary for the adoption. Examples of qualified expenses are court fees, home study, lawyer fees, medical examinations/physicals, travel expenses (meals, lodging, airline, gas), agency fees, dossier fees, and any other fees that are directly related to the adoption.

The question I receive the most is whether living expenses of the expectant mom that are paid by the prospective adoptive parents in domestic infant adoptions are a qualified adoption expense under the Adoption Tax Credit. They are not.

A good rule of thumb when determining what adoption expenses to include for the Adoption Tax Credit: when in doubt, use expenses that you know are covered. Most adoptions, other than from foster care, will exceed the amount of the credit, so simply choose the expenses that are clearly considered “qualified adoption expenses”.

The Adoption Tax Credit rarely covers all expenses. To make it easier, start by using the ones you know are covered.

A good rule of thumb when determining what adoption expenses to include for the Adoption Tax Credit: when in doubt, use expenses that you know are covered.

When to Apply for the Adoption Tax Credit?

International and foster care adoptions must be final before you can apply for the Adoption Tax Credit. Expenses for domestic adoptions that are not yet final can be taken the year after the expenses are paid or you can wait until the adoption is final.

How Does the Adoption Tax Credit 2018 Work?

Line 47 of your Federal 1040 shows your tax liability. The difference between your tax liability and your federal withholding is either what you get as a refund or what you owe the federal government when you do your tax return.

The Adoption Tax Credit comes in on Line 55 (Other Credits) from Form 8839 and takes care of your tax liability up to $13,810 for 2018. You will get your withholding back (if tax liability is less than maximum credit amount) and child tax credit drops down to an additional child tax credit (if you qualify).

If you do not use all of the credit in the first year you can carry it forward for up to 5 years.

How Does the Adoption Tax Credit Work with Special Needs Adoptions?

If you adopt a child with special needs through foster care, you may be entitled to claim the full amount of the adoption credit even if you did not have expenses. Each state has different criteria that qualify a child as “special needs”. The special needs declaration must come from the state in which the adoption was final. In order to qualify as a special needs adoption, you must have a signed adoption “Subsidy Agreement” with the state. (Some states call it the “Adoption Eligibility Assistance Determination.”)

No international adoption is considered special needs for IRS purposes, so the Adoption Tax Credit will be for the amount of your qualified adoption expenses only.

The Adoption Tax Credit 2018 has special qualifiers for Special Needs Adoptions.

The special needs declaration must come from the state in which the adoption was final. In order to qualify as a special needs adoption, you must have a signed adoption “Subsidy Agreement” with the state.

What Documentation Do I Need To Keep for the IRS for the Adoption Tax Credit?

  1. Final Judgment of Adoption (all adoptions)
  2. Adoption Assistance Eligibility Determination (Subsidy Agreement) that declares the child special needs, if claiming credit for a child declared special needs by your state through foster care (foster adoptions)
  3. A home study/placement agreement completed by an authorized placement agency (all adoptions except foster)
  4. All documentation of paid qualified expenses. (all adoptions except foster)
  5. All documents must be signed and dated. (all adoptions) The IRS will not accept any Home study/Placement agreement, Judgment of Adoption, or Subsidy agreement/Eligibility agreement without it being signed and dated by the proper authorities.

Need More Detailed Information on the Adoption Tax Credit?

If this introductory guide has not answered all your questions, check out our 2017 Adoption Tax Credit one-hour online course. The experts for this course are Becky Wilmoth (author of this guest blog post) and Josh Kroll, the Adoption Tax Credit specialist at the North American Council on Adoptable Children. They are the two most knowledgeable people we know on the Adoption Tax Credit.

This course covers:

  • What is a “credit” and how does it differ from a deduction or some other form of tax savings?
  • What type of adoptions are included or excluded?
  • How does the adoption tax credit differ with different types of adoption?
  • What happens if you complete two separate adoptions in one year? In two consecutive years? What about adopting siblings at the same time?
  • What is a qualified adoption expense for purposes of the adoption tax credit? Specific examples of the most commonly asked questions about qualified adoption expenses.
  • When can you claim the Adoption Tax Credit?
  • What income level is excluded from claiming the 2017 Adoption Tax Credit? How is your income determined?
  • What if you can’t use all the credit in one year because you don’t have $13,570 in federal tax liability? How long can the credit be carried over? Will the IRS automatically apply the carry over?
  • Will the Adoption Tax Credit offset self-employment tax, or will it only offset income tax liability?
  • What type of documentation should you submit with your taxes? What type of documentation should you keep in your records? How to organize and submit your documentation.
  • Does the adoption tax credit apply to kinship adoptions? To kinship guardianship?
  • And much more.
Image credit: Pictures of Money; Crash Test Mike; Disability Wales


31/12/2018 | by Dawn Davenport | Categories: Adoption, Adoption Blog, Blog | 1 Comments

One Response to Adoption Tax Credit 2018 Guide

  1. Pingback: Check out this great resource from Creating a Family! – Hopscotch Adoptions

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