Adoption is an investment in your future family. Many of the expenses are tax deductible. You can receive tax credits for court costs, attorney’s fees, travel required by the adoption process including meals and lodging, and for the cost of your home study. But you need to check the fine print before you do your taxes: the adoption tax credit is not available for stepparent adoption.
The adoption tax credit
Most laws and regulations regarding adoption are at the state level. Each state has its own laws about adoption for everything from who can adopt to how long a waiting period follows a baby’s birth. This is why it is essential that you have an experienced adoption lawyer qualified to practice in your state when you go through your adoption journey.
One of the few laws about adoption at the federal level is the adoption tax credit. All U.S. taxpayers are entitled to what the IRS calls “a tax credit for qualified adoption expenses paid to adopt an eligible child.”
Qualified expenses
The “qualified adoption expenses” part of that description is what cuts out stepparent adoption. The IRS rules say specifically, “Qualified adoption expenses don’t include expenses that a taxpayer pays to adopt the child of the taxpayer’s spouse.”
That is, if you want to adopt your wife’s child or your husband’s child — your stepchild — your expenses do not give you a deduction on your taxes.
It is a bit surprising to learn that registered domestic partners are not covered by this rule. If you are a legally registered domestic partner rather than a spouse, your adoption expenses for your partner’s child are tax deductible. However, Arkansas does not recognize or register domestic partners, so this does not affect Arkansas adoptions.
Why on earth…?
On the face of it, it makes no sense that adopting your stepson or stepdaughter is not tax deductible when adopting another child would be. If we consider the goal of the deduction, it makes a little more sense.
Income taxes have the purpose of collecting funds to cover the costs of the federal government, but they are also designed to encourage certain behaviors. Child tax deductions encourage people to have children. Earned income deductions encourage people to work. Adoption tax credits are intended to encourage people to adopt children who need homes. These adoptions end the need for public assistance and care of those children.
Your stepchild already has a home and is already being cared for by you and your spouse. The adoption has plenty of benefits, but it doesn’t save the government any money. There is no incentive for the government to cover your costs.