Qualified Adoption Expenses (QAE): What It is, How It Works

What Are Qualified Adoption Expenses (QAE)?

Qualified adoption expenses are the necessary costs paid to adopt a child younger than 18 years of age or any disabled person who requires care. In the United States, qualified adoption expenses (QAE) are those expenses that the Internal Revenue Service (IRS) defines as reasonable and necessary and can be used to claim an adoption credit or exclusion that reduces the adopting parents' taxable income.

Understanding Qualified Adoption Expenses (QAE)

The Internal Revenue Service allows you to offset your tax bill with a credit for your qualified adoption expenses as long as you meet certain eligibility requirements. To report your qualified adoption expenses, you'll use IRS Form 8839.

Eligible taxpayers use IRS form 8839 to provide the information required to claim the adoption credit on their federal tax returns. Taxpayers must provide the adopted child's first and last names, year of birth, and identifying number. They must also note whether the child has special needs or is foreign-born.

The tax credit for QAE phases out for taxpayers whose modified adjusted gross incomes exceed a certain threshold. Taxpayers may not claim the adoption credit for any fees paid or reimbursed by an employer or government program. They also may not claim the credit when adopting a spouse's child.

If you paid qualified adoption expenses to adopt a child who is a U.S. resident or citizen, then you may be eligible for the credit, even if the adoption has not been finalized or was finalized in a different tax year. You may also qualify for the credit if you paid expenses to adopt a foreign child.

Maximum Qualified Adoption Expenses

The maximum credit amount allowed for adoptions is $14,890 per child for 2022 and $15,950 per child in 2023. In addition, the adoption tax credit is no longer refundable, meaning that to recognize the full benefit of the credit, your total tax must be at least equal to the credit.

For example, if your total tax for the year is only $10,000, but you spend $14,000 in qualified adoption expenses, $10,000 is the most you can save in tax. However, if the entire credit is not used, any remaining amount can be carried forward for up to five years.

For the tax year 2022, as long as your modified adjusted gross income is $223,410 or less, you qualify for the full credit. The credit phases out as your income increases and goes away completely when it exceeds $263,410.

For the tax year 2023, as long as your modified gross income is $239,230 or less, you qualify for the full credit. The credit phases out as your income increases and goes away completed when it exceeds $279,230.

Taxpayers who adopt a child deemed to have special needs are generally eligible for the full credit in the year the adoption is finalized, regardless of their expenses.

Examples of Qualified Adoption Expenses

The IRS defines qualified adoption expenses under Internal Revenue Code Section 23(d)(1). Tax code explicitly states that qualified adoption expenses include:

• Reasonable and necessary adoption fees.
• Court costs and attorney fees.
• Traveling expenses, including amounts for meals and lodging while away from home.
• Other expenses directly related the legal adoption of an eligible child.

These expenses may have been paid before an eligible child has been identified. An eligible child is defined as an individual who is under the age of 18 or is physically or mentally incapable of self-care.

Qualified Adoption Expense Exclusions

The IRS also strictly prohibits the inclusion of several types of expenses related to an adoption for consideration as a qualified adoption expense. For example, qualified adoption expenses explicitly do not include costs a taxpayer pays to adopt the child of the taxpayer's spouse.

There are also regulations surrounding the timing of when the credit may be taken based on the timing of when the expense occurs. Dollar limits are also in place for costs related to a singular adoption effort in which a credit has previously been claimed.

The Bottom Line

When a taxpayer adopts a child, certain costs may be leveraged to reduce the taxable income of the taxpayer and thereby reduce their federal income tax liability. The expenses must be reasonable and necessary for the adoption, and these costs can be incurred and claimed leading up to the adoption. These costs are reported on Form 8839, and deductibility of the expense are subject to income limits.