Adoption Taxes

Question

I'm in the process of an international adoption of a minor and have the below questions about how this will impact my taxes over the next few years:

1. If the adoption becomes legalized in 2022, but I don't take custody (and she doesn't enter the US) until 2023, which year do I start listing her as a dependent on my taxes?

2. My employer will reimburse up to $20,000 in adoption costs -- see details below. Based on this language about "grossing up", can I still also claim the Adoption Tax Credit on my 2022/2023 taxes? (Note: I will not be submitting any expenses across both. I have $35,000+ in costs, and will submit different expenses to my employer vs. what I claim for my taxes).
From Employer: Any reimbursement you receive for eligible adoption benefits, above any legally allowed tax-free limits must be treated as income to you. The company will “gross up” your reimbursement amounts based on your tax situation, so you’ll be able to receive the full $20,000 benefit.
3. The Adoption Tax Credit goes up by $1,000 in 2023. But I assume that I have to file for the year that I paid the expenses (i.e. anything paid in 2022 must be claimed in 2022). Does that mean I can claim the $14,890 for 2022 taxes and then claim an additional ~$1,000 in 2023 taxes?

tgaborit · Answer

Getting an adoption finalized is exciting in so many ways!

The IRS has specific rules on how to claim the adoption credit when you are doing a foreign adoption versus a domestic one. Adoption Credit Information

Generally, the credit is allowable whether the adoption is domestic or foreign. However, the timing rules for claiming the credit for qualified adoption expenses differ, depending on the type of adoption.

A domestic adoption is the adoption of a U.S. child (an eligible child who is a citizen or resident of the U.S. or its possessions before the adoption effort begins). Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment (even if the adoption is never finalized and even if an eligible child was never identified).
A foreign adoption is the adoption of an eligible child who isn't yet a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final.

Once an adoption becomes final, and subject to the dollar limitation, qualified adoption expenses paid during or after the year of finality are allowable as a credit for the year of payment, whether the adoption is foreign or domestic.

Based on the above information, you will claim the credit for all expenses in the year the adoption becomes finalized.

If you are receiving adoption assistance from your employer: Adoption and Taxes (employer reimbursements)

What are employer-provided adoption benefits?

A taxpayer may be eligible for employer-provided adoption benefits. According to the IRS, employer-provided adoption benefits are amounts your employer paid for qualified adoption-related expenses to you directly or to a third party on your behalf. You can exclude these benefits from your taxable income up to $14,890 for 2022. But you can't use the same expenses for the exclusion as you do for the credit. You can, however, exclude up to the maximum allowable and then take the maximum credit for additional unreimbursed expenses.

As for when you will add the new dependent to your return. This would be done the year that the dependent comes to live in your home as there are certain requirements to be considered a dependent on a return. They need to be considered a US Citizen to be claimed as a qualifying child on your return: Rules for Claiming Dependents