Qualified Adoption Expenses (QAE)

Navigating Qualified Adoption Expenses: A Comprehensive Guide

Understanding Qualified Adoption Expenses (QAE)

Qualified adoption expenses (QAE) encompass the essential costs associated with adopting a child under the age of 18 or a disabled individual in need of care. These expenses, recognized by the Internal Revenue Service (IRS), include various fees such as adoption fees, court costs, attorney fees, and travel expenses directly related to the adoption process. By claiming these expenses, adopting parents can reduce their taxable income through an adoption credit or exclusion.

Eligibility and Reporting

To benefit from the adoption credit, taxpayers must meet certain eligibility criteria and report their qualified adoption expenses using IRS Form 8839. This form requires detailed information about the adopted child, including their name, year of birth, and identifying number. Additionally, taxpayers must specify if the child has special needs or is foreign-born.

Income Thresholds and Phase-Out

The adoption credit phases out for taxpayers with modified adjusted gross incomes above certain thresholds. Expenses reimbursed by an employer or government program are not eligible for the credit, nor are expenses related to the adoption of a spouse's child. However, taxpayers may still qualify for the credit even if the adoption is not finalized or if the child is foreign-born.

Maximum Credit Amount

For the tax years 2021 and 2022, the maximum credit amount allowed for adoptions is $14,440 and $14,890 per child, respectively. It's important to note that the adoption tax credit is no longer refundable, meaning taxpayers must have a tax liability equal to or greater than the credit amount to fully benefit from it. Any unused portion of the credit can be carried forward for up to five years.

Income Phase-Out Thresholds

For the tax year 2021, the full credit is available to taxpayers with modified adjusted gross incomes of $216,660 or less, phasing out completely at $256,660. In 2022, the full credit is accessible for incomes of $223,410 or less, with complete phase-out occurring at $263,410.