Published on Feb 15, 2025 5 min read

Making Adoption Affordable: The Essentials of Qualified Adoption Expenses

Adopting is a great thing; it's a wonderful opportunity for families to grow in love and connection. However, adoption can be expensive, and many prospective parents may find it difficult. The U.S. government offers an adoption tax credit to try and alleviate these costs. Qualifying Adoption Expenses (QAE) is the heart of this tax benefit and allows families to claim qualifying adoption expenses on their tax return if some specific criteria are met.

With that out of the way, this article goes over what QAE entails, how the tax credit works, and how to maximize its value.

What Are Qualified Adoption Expenses (QAE)?

Qualified Adoption Expenses refer to necessary expenses incurred by individuals or couples in the process of legally adopting a child. To qualify for the federal adoption tax credit, these expenses must fall within specific categories as defined by the IRS. The intent behind QAE is to provide a financial cushion, making adoption more accessible by reducing the after-tax cost of the process.

QAE typically includes various direct costs, such as agency and legal fees, court expenses, and travel. However, it excludes costs that may be indirectly related to adoption or not essential to completing the legal process.

Who is Eligible for the Adoption Tax Credit?

Eligibility for the adoption tax credit isnt solely based on expenses. The IRS has specific requirements regarding the adoptive child and household income.

Age Requirement: The child must be under 18 at the time of adoption or physically or mentally incapable of self-care.

Income Phase-Out: For 2024, the adoption tax credit begins to phase out for families with a modified adjusted gross income (MAGI) over 252,150, and it is completely phased out at 292,150. This means families with higher incomes may only receive partial benefits or may not be eligible at all.

Domestic vs. International Adoption: For domestic adoptions, QAE can be claimed the year after they are incurred, even if the adoption hasnt been finalized. For international adoptions, the credit can only be claimed in the year the adoption becomes final.

Inclusions Under Qualified Adoption Expenses

Understanding the eligible expenses within QAE can be valuable for adoptive parents aiming to maximize their tax benefits. Heres a closer look at what is typically included:

Adoption Fees: Payments made to public or private adoption agencies are one of the largest expenses prospective parents face. These fees usually cover the cost of screening, training, and matching parents with children, and they are eligible for tax credit consideration.

Legal and Court Fees: Legal support is essential in the adoption process, especially in securing parental rights and finalizing the adoption. The IRS includes costs for legal counsel and court fees under QAE.

Home Study Costs: A home study is a required process for most adoptions and involves a thorough evaluation of the adoptive parent's home environment. These expenses, often handled by social workers or adoption agencies, qualify as part of QAE.

Medical Expenses of the Adopted Child: While medical expenses are typically not covered, there are some cases (especially in foster or special needs adoptions) where the child's medical evaluation or treatment during the adoption process might qualify.

Travel Expenses: In cases of international adoptions or adoptions where the adoptive parents need to travel within the country, the IRS considers reasonable travel costs eligible for the tax credit. This includes expenses for transportation, meals, and lodging, but only if the travel is essential for the adoption process.

Exclusions from Qualified Adoption Expenses

Only some costs associated with adoption are eligible for the adoption tax credit. Exclusions include:

Adopting a Stepchild: If the adoption involves a spouses biological child, the associated expenses are ineligible for tax credit.

Violations of State or Federal Law: Any expense that contravenes legal requirements is excluded, as are costs incurred through unlicensed or unauthorized agencies.

Expenses Covered by Employer Assistance or Grants: When an employer offers an adoption assistance benefit, those expenses cannot be double-counted for the tax credit. Similarly, any form of public or private assistance that offsets costs must be excluded from QAE.

Maximizing the Benefits of Qualified Adoption Expenses

While the adoption tax credit offers a meaningful way to reduce the financial strain of adoption, maximizing its benefits requires careful planning. Here are some strategies that can help:

Maintain Thorough Documentation: Keeping detailed records, including invoices, receipts, and proof of payments, can simplify the tax filing process and ensure that all eligible expenses are covered.

Consult a Tax Professional: Adoption tax laws can be intricate, especially for families with unique adoption circumstances. Consulting a tax advisor familiar with adoption-related tax credits can be invaluable for families seeking to optimize their QAE claims.

Utilize Employer Assistance When Available: If an employer provides adoption assistance benefits, its worth considering as it could supplement out-of-pocket expenses. However, ensure that no double-dipping occurs; expenses covered by employer assistance cannot also be claimed under the tax credit.

Leverage State Adoption Benefits: Some states offer additional tax credits or deductions for adoption expenses, which can supplement the federal credit. Understanding your states specific programs can further reduce the cost burden.

Plan for Special Needs Adoptions: Families adopting a child with special needs may qualify for the full tax credit amount, even if actual expenses fall short. Special needs status is determined at the state level, and adoptive families must meet certain criteria to claim this benefit.

Conclusion

The financial challenges of adoption are real, but understanding Qualified Adoption Expenses and the adoption tax credit can make the process more affordable for families. Through careful planning, documentation, and professional guidance, adoptive families can reduce their tax burden and enhance the financial feasibility of adoption. By taking advantage of every eligible benefit, prospective parents can focus more on building a loving home and less on the financial obstacles along the way. Adoption can be a beautiful journey, and with the right support, it can also be a financially manageable one.