Adoption Tax Credit Announced for 2016

The IRS has issued Rev. Proc. 2015-53, which establishes the maximum amount of the Adoption Tax Credit under Section 23(a)(3) of the IRS Code. This will apply to all adoptions finalized in calendar year 2016.

The amount is $13,460 per eligible child (an increase of only $60 from the 2015 maximum). As in prior years, the adoption tax credit will begin to phase out: this year for households with a modified adjusted gross income of $201,920. It will completely phase out for households with modified adjusted gross income of $241,920. This credit will apply to adoptions will qualifying expenses of up to $13,460. What does that mean? An example: if your adoption has $5,000 in legal fees, $2,000 in agency fees, and $900 in birth parent living expenses and counseling, and that’s the entirety of your adoption-related expenses, then you would receive a credit of $7,900, NOT the entire $13,460 amount. That’s because you only receive a credit for expenses that you actually incur. It’s also important to be careful in keeping accurate records and proof, because historically a large number of tax returns with the credit have been audited.

The credit for a child with special needs is also $13,460 for 2016. Also as in prior years, adoptive parents will automatically receive the full amount of the tax credit, regardless of expenses, for child(ren) adopted out of foster care (i.e. special needs). The phaseouts are the same for households with gross income as stated above – $201,920 to $241,920.

We understand that these laws can be confusing, and we’re always happy to help explain them to you during your adoption. The tax credit can be an important means of recouping expenses in adopting your child.

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