For ten years, the so-called same-sex adoption tax credit allowed married same sex couples who adopted their partner's child to take advantage of federal tax credits that were not available to married heterosexual couples. Though this loophole is no longer available, the cost of adopting a child, such as fees, court costs, home screenings, and travel, still may be partially offset by the federal adoption tax credit.
This article focuses on the special concerns of same-sex couples with respect to the adoption tax credit.
How the Adoption Tax Credit Works
To help promote adoption, the IRS allows adopting parents to claim an adoption tax credit, deducting qualifying costs of adoption from their federal tax obligations. The maximum amount that can be claimed varies by year ($13,570 per child for tax year 2017, for example). If your employer provides adoption assistance, you may also claim an exclusion for these funds, meaning they will not count as income when calculating your federal tax obligations.
The tax credit may be claimed for qualified adoption expenses even if the adoption attempt was unsuccessful. Qualified adoption expenses include:
The adoption credit is nonrefundable, meaning that it is limited to your tax liability for the year. To claim the full amount, you must have tax obligations equal to or higher than the credit's maximum.
The tax credit and exclusion are subject to income limitations. To claim the full tax credit, your taxable income cannot exceed a maximum level. In 2017, this limit was $203,541. Those earning more than $243,540 (based on modified adjusted gross income) aren't eligible for the credit.
Couples Who are Married
Couples who are married may claim the tax credit when adopting a child together. However, a married individual can't claim the adoption tax credit for expenses paid when adopting the other spouse's child. Expenses associated with second parent or step-parent adoptions don't count as qualified adoption expenses for federal tax purposes. The exclusion of second parent and step parent adoptions from the tax credit reflects the law's focus on encouraging adoption of children in foster care or who otherwise lacked legal parents.
Prior to 2013, married same-sex couples were able to claim the credit when one partner was adopting the other partner's child. This led it to be called the same-sex adoption tax credit. Married same-sex couples could claim the adoption tax credit when their straight counterparts couldn't because the Defense of Marriage Act (DOMA) prevented the federal government from treating them as married. If one spouse wanted to adopt the child of his or her spouse, the expenses associated with the adoption could be deducted, as the IRS refused to recognize same sex couples as married.
The use of the adoption tax credit in this way came to an end when the Supreme Court struck down DOMA as unconstitutional in United States v. Windsor. Today, married same-sex couples are treated the same as opposite-sex couples by the IRS and can't take advantage of the same-sex adoption tax credit for second parent or stepparent adoptions.
Married couples (gay or straight) may still deduct expenses related to the adoption of a new child that was not already the legal child of either spouse.
Couples Who are Unmarried
The adoption tax credit is available to unmarried couples when one partner adopts the other's child. Qualified adoption expenses include expenses incurred when a registered domestic partner or individual adopts their partner's child through a second parent adoption. If one partner has a child, the couple may consider completing a second parent adoption before marriage, in order to take advantage of the adoption tax credit.
Since the adoption tax credit is nonrefundable, an unmarried couple looking to adopt may chose to have the partner with the highest tax liability cover adoption expenses, allowing the couple to benefit from the highest deduction available.
Get Legal Help With Same-Sex Adoption and Tax Credits
The same-sex adoption tax credit no longer works like it used to, but there are still important tax and legal issues when a couple seeks to adopt. If you have questions about same-sex adoption or tax incentives for adopting, consider contacting a qualified adoption law attorney near you.