Understanding Form 8839: Adoption Tax Credit

Understanding the intricacies of the form and the adoption tax credit can be challenging. Here are additional information and tips that can make your journey smoother:

• Keep track of your expenses during the adoption process: Detailed records of all your adoption-related expenses are crucial. They provide proof of the costs incurred during the adoption process and can be beneficial if there are queries from the IRS. Expenses directly related to the adoption process, such as legal fees, court costs, travel expenses, and other associated costs can be claimed as qualified adoption expenses.
• Seek professional tax advice: Adoption tax laws can be complex, and the consequences of making a mistake on the form can be costly. Therefore, it’s advisable to seek professional tax advice, especially if your situation is complicated. A tax professional can help you understand the finer details of the federal income tax law as it pertains to adoption and ensure you’re claiming all the credits you’re entitled to.

While the adoption credit is a significant financial benefit, it’s essential to understand its limitations. The credit is nonrefundable, meaning it can reduce your tax liability to zero, but any excess credit cannot be refunded. However, any unused portion of the credit can be carried forward to the next tax year.

For families adopting a child with special needs, additional considerations come into play. Under federal income tax law, a child with special needs is a child who the state determines cannot or should not be returned to their parent’s home and a special needs child who likely won’t be adopted unless assistance is provided. For qualified expenses for these adoptions, you may be eligible to claim the full amount of the adoption credit, regardless of the actual amount of paid qualified adoption expenses.

Filing the form involves several steps:

• Identify your eligible child: The child must meet the age and capability criteria mentioned above.
• Calculate your total qualified adoption expenses: Add up all the adoption expenses directly related to the legal adoption of an eligible child.
• Check the income limits: The adoption credit is subject to income limitations. The credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain threshold and is completely phased out at a higher income level.
• Fill out: Report the necessary information on the form, including your total paid qualified adoption expenses, employer-provided adoption benefits, and any previous adoption credit carryforwards.
• Attach the form to your federal tax return: Once you’ve completed the form, attach it to your Form 1040 or 1040-SR.

If your employer provides adoption assistance benefits, these can also affect your tax situation. Employer-provided adoption benefits are amounts your employer pays directly to either you or to pay a third party for qualified adoption expenses under a qualified adoption assistance program. You must report these benefits on the form and they are excluded from your gross income.