All About the 2018 Adoption Federal Tax Credit

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adoption tax credit

You may have heard that there’s a tax credit for adopting families. It’s true! If you adopt in North Carolina or even try to pursue an adoption, there’s a federal tax credit waiting for you.

The U.S. federal adoption tax credit is a generous program that’s designed to encourage adoption and help adopting families defray the expenses associated with adoption. If you’re considering adoption, the adoption tax credit can be an important resource for your adoption journey. It’s important to understand the federal adoption tax credit in order to make sure that you take full advantage of what’s available to you and your family. Here’s what you need to know about the U.S. adoption credit:

What is the 2018 U.S. adoption tax credit?

The U.S. adoption tax credit is a tax credit that U.S. taxpayers can use to deduct adoption expenses from their taxes. Taxpayers who adopt or even begin the adoption process can deduct qualifying expenses from their tax liability. The purpose of the U.S. adoption tax credit is to make adoptions more affordable. Taxpayers can claim their tax credit when they complete their annual taxes. The 2017 adoption tax credit was $13,570.

Is the U.S. adoption tax credit available in North Carolina?

The adoption tax credit is a U.S. federal program, and it’s available to all American taxpayers. It doesn’t depend on your state of residency, and the states have no say over whether to authorize the tax credit or how much to offer. The tax is a federal tax. A state can offer an additional tax credit for state taxes only, but the U.S. adoption tax credit is universal to all states including North Carolina.

The U.S. adoption tax credit is a direct tax credit

The U.S. adoption tax credit is a straight dollar-for-dollar deduction from your taxes. That means you can use the credit to directly reduce your taxes. For example, if you have $3,500 in qualifying adoption expenses and you would otherwise have an $8,000 tax liability, you can use the adoption tax credit to reduce your tax liability to $4,500.

The tax credit is a credit. It’s not a deduction from income that’s later applied to your tax burden as a percentage of income. Instead, the adoption tax credit works as a direct refund of your tax liability. It works dollar-for-dollar to directly reimburse you for what you would otherwise pay in taxes. The adoption tax credit is a great way to indirectly fund a large portion of your adoption expenses.

If your tax liability hits zero in any single year because of the adoption tax credit, you can reserve the remaining amounts of the credit for future years. You can’t use the adoption credit to refund your tax liability to less than zero. It’s important to space your tax credits out between multiple years if you’re going to be in a situation where your tax liability is zero, but you should speak with your CPA to learn more about your individual tax situation.

What counts as qualifying expenses for the federal adoption tax credit?

Most adoption-related expenses qualify as part of the U.S. adoption tax credit. Fees like court costs and filing fees count as qualifying expenses, and even travel expenses qualify. It’s important to save proof of your expenses in order to have an accurate accounting of the amounts that you claim for the credit. Your attorney can help you make sure to take advantage of all qualifying expenses.

Who qualifies to take the adoption tax credit?

The adoption tax credit is applicable to all adoptions of children under the age of 18. Even adults over the age of 18 may qualify if they’re unable to care for themselves. It doesn’t matter if you’re in North Carolina and adopting within the state or adopting from another state, the federal adoption tax credit applies universally to all adoptions.

Does the adoption tax credit apply to international adoptions?

Yes, the adoption tax credit applies to international adoption. However, there are some differences to be aware of between domestic and foreign adoptions. In a domestic adoption, you qualify to take the adoption tax credit in the tax year after you have the adoption expense. You don’t have to wait until the adoption is final. You don’t even have to complete the adoption to use the credit if you’re trying for a domestic adoption. For an international adoption, you can’t claim the credit until your adoption is final.

Are there income limits for the U.S. adoption tax credit?

The adoption credit applies up to a certain income level – if you hit the income limit, the adoption credit starts to phase out. In 2017, the income limit for the adoption subsidy was $203,540. Above an income level of $203,540, your ability to claim the adoption tax credit is reduced. If you make more than $243,540 in a year, you can’t claim the adoption tax credit at all. If you have an income in this range, it’s important to carefully consider your options when it comes to the adoption tax credit. Income limits may lower your eligibility for the tax credit or prevent you from claiming the credit entirely.

What form do I need to claim the adoption tax credit?

To claim the U.S. federal adoption tax credit, you fill out Form 8839 along with your other tax paperwork. The form is for qualified adoption expenses. The form asks for information about the qualifying child and the expenses you’re claiming through the tax credit.

Does North Carolina have an adoption tax credit?

North Carolina does not have an adoption tax credit for state taxes. North Carolina residents are eligible to take full advantage of the U.S. federal tax credit. However, there’s no additional tax credit that’s available just for residents of North Carolina.

Even though there isn’t a tax credit for North Carolina in addition to the federal tax credit, there are many other state adoption assistance programs available. You may qualify to receive monthly assistance payments until your child reaches adulthood. There are also direct reimbursements for expenses that may be available to you.

When can I claim the adoption tax credit?

For domestic adoptions, you can claim the adoption tax credit in the tax year after you incur the expenses. You can claim unused credits for up to five additional years. For international adoptions, you can claim the adoption tax credit in the tax year after your adoption is complete.

The 2018 American adoption tax credit

The U.S. adoption tax credit can help you lower the true costs of adoption through tax credits. The credits are a direct refund of your federal tax liability. Adopting families in North Carolina qualify to tax advantage of the credit.

For how any of these situations apply to you, it’s important to work with your team of professionals, including your adoption attorney and CPA.

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