Author: Ben Gelbart

Tax Credit for Adoption Costs

Preface: “Your greatest contribution to the kingdom of God may not be something you do but someone you raise.” — Andy Stanley

Tax Credit for Adoption Costs

If you incur costs related to the adoption of a child, you can claim up to $15,590 as a tax credit in 2023.

In addition to the Adoption Credit, up to $15,590 of adoption costs provided by your employer can be completely excluded from your taxable income. Just make sure you don’t try to claim credit for costs you are also excluding.

The credit is non-refundable, which means you cannot claim more credit in a single year than you have tax liability. For this reason, A portion of the unused credit can be carried forward for use in up to five future tax years.

After a successfully completed adoption, an adopted child is treated the same as any other child for purposes of all dependent-related tax benefits such as the Child Tax Credit, Earned Income Credit, and Head of Household filing status.

What Costs Are Eligible?

For purposes of the Adoption Credit and Adoption Exclusion, the child you are adopting must be under 18 years old or physically or mentally incapable of self-care. The child cannot be your spouse’s child.

The metric the IRS uses to decide if a cost is qualified is if it is “reasonable and necessary” for legal adoption of a child. This typically includes court costs, attorney fees, and travel costs, including meals and lodging. Costs of surrogate parenting are not eligible.

Limits on the Credit

The limit of $15,590 applies to all costs incurred toward a successful adoption, even if it takes place over multiple years.

If an adoption attempt is unsuccessful and a new adoption attempt is begun, the costs of the unsuccessful adoption are considered part of the new adoption attempt.

This dollar limit applies separately to the credit amount and the exclusion amount.

Your ability to claim the credit or to exclude employer-provided costs will begin to phase out if your Modified Adjusted Gross Income (MAGI) is over $239,230 in 2023. It completely phases out if your MAGI is over $279,230.

To figure this phase out, MAGI means Adjusted Gross Income (AGI) modified to add back most Schedule 1 deductions and any excluded foreign income.

Foreign vs. Domestic Adoption

If the child you are adopting is not yet a U.S. citizen or resident at the time the adoption begins, the adoption is considered a foreign adoption. This means that you must wait until the adoption is final before taking the credit or excluding any employer-provided adoption costs. In the year the adoption becomes final, you may take credit and exclude all amounts eligible up to and including that year. Additional costs incurred in future years may be credited or excluded in the year they are paid.

For a domestic adoption, all credits and exclusions incurred before the adoption is final may be taken in the year following when they are incurred, even if the adoption is not yet final. In the year the adoption is final and in subsequent years, the credits and exclusions are taken in the year incurred, the same as for a foreign adoption.

Special Needs, Special Adoption Credit Rules

If you are adopting a child in a domestic adoption who is determined by a state to have special needs, you may claim the maximum amount of the credit in the year the adoption becomes final, regardless of costs you actually incurred. In this case, you will not claim the credit in years before the adoption becomes final. The credit is still non-refundable and is still subject to the same income phaseout.

For a child with special needs, you may also exclude the maximum amount of income regardless of whether your employer actually provided any adopted-related costs, but only if that employer has in place a written qualified adoption assistance program.

Deducting Expenses for Use of Your Car

Preface: “The one thing that unites all human beings, regardless of age, gender, religion, economic status, or ethnic background, is that, deep down inside, we all believe that we are above-average drivers.” ― Dave Barry

Deducting Expenses for Use of Your Car

If you use your car for business purposes, you can deduct car expenses from your business income. Business use includes delivery and rideshare (“gig”) drivers, but does not include drivers who are employees. Be aware that for tax years 2018-2025, the cost of using your car as an employee is no longer allowed as an unreimbursed employee travel expense.

This article will help you determine what costs are considered business use and explain how to figure your deductions.

You can generally use one of the two following methods to figure your deductible vehicle expenses.

        • Standard mileage rate.
        • Actual expenses.

Standard Mileage Rate (SMR)

The SMR method is the simpler of the two methods. The important thing for deducting SMR is to keep track of how many miles you drove for business during the year. You should use a logbook or app to track your business miles. To take the deduction, you just multiply the number of miles by a fixed dollar amount that is set by the IRS each year. For 2023, the standard mileage rate was 65.5 cents per mile.

There are four additional car-related expenses you are allowed to deduct if you use SMR. These are: parking fees and tolls, the interest portions of your car loan payments, and personal property tax assessed on your car by any state or local jurisdiction.

If the car is not used 100% for business, the interest expense and personal property tax must be prorated for the business use percentage of the car. If you use the SMR method, one easy way to figure business use percentage is to take a picture of your odometer every New Year’s morning. This lets you easily compute the total miles driven during the year. If you know your business miles, you may then easily find your business percentage by dividing your business miles by your total miles.

Parking fees and tolls incurred during business trips do not have to be prorated because they are direct business costs.

Parking fees you pay to park your car at your regular place of work are nondeductible because they are considered commuting expenses. Commuter expenses are never deductible, even for the self-employed.
Fines for violations, parking tickets, and other penalty payments are never deductible under any method.

If you want to use SMR, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either SMR or actual expenses. If you want to use SMR for a car you lease, you must use it for the entire lease period.

Actual Expenses

If you choose to deduct actual expenses, you cannot later choose to use SMR. If you use five or more cars for business at the same time during the year, you must use the actual expenses method.

To deduct actual expenses, you must track all car-related expenditures. This includes all previously mentioned car expenses like parking and tolls, interest, and personal property taxes, and also all other expenses such as gas, oil, tires, repairs, registration, insurance, and garage rent. If the car is not used 100% for business, you must figure a business percentage and prorate the costs.

Depreciation

Another business expense you can and should deduct if you choose actual expenses is depreciation. This allows you in effect to deduct the cost of the car itself over the period of its useful life, typically a five-year period. To figure depreciation expense, you will need to know the cost basis of the car and the date you first used it for business. Calculating the exact amount of depreciation to take each year requires a depreciation calculator or depreciation table.

If the car is not used 100% for business, you will need to prorate the depreciable amount.

EXAMPLE: If you spent $50,000 on a car, placed it service on January 1, and used it 60% for business, one way to take the depreciation would be to deduct $6,000 of depreciation expense each year for a total of five years.

You must decease the cost basis of your car for depreciation.

EXAMPLE: Following the above example, you spent $50,000 on a car and deducted $6,000 of depreciation expense each year for a total of five years. If you then sold the car for $25,000, you would actually owe tax on a $5,000 gain on the sale. This might surprise you, since you sold the car for half of what you originally paid for it, but from the IRS’s point of view, the basis of the car is adjusted down by the amount of depreciation. Therefore, at the time you sold the car, it had an adjusted basis of just $20,000. So you actually sold it for more than its basis.

If you use the SMR, you do not need to calculate depreciation because the annual SMR amount includes an amount due to depreciation. For 2023, this amount was 28 cents per mile.

EXAMPLE: If you use the SMR and drove your car 10,000 miles for business in 2023, you take a SMR deduction of $6,550 (65.5 cents per mile for 1,000 business miles). You do not deduct for depreciation expense because the implied depreciation is included in the SMR deduction. However, you must reduce the basis of the car by $2,800 (28 cents per mile for 1,000 business miles).

What Counts as Business Use of a Car?

Traveling from one workplace to another, or to and from clients or customers, is considered business use.

If you have an office or other regular workplace you commute to, driving between your home and regular place of work is not considered business use, even if you are self-employed.

If you drive between many pickup and delivery sites, most of the miles you drive to, from, and between deliveries and pickups are business miles. One grey area is the drive from your home to your first working location and to your home from your last location. These might be considered commuting, and thus not business miles. However, if you are available for new orders at these times, say, by being active on an app that you get work through as you drive, you may plausibly claim these miles as business miles as well.

Side trips out of your way for personal errands should never be counted as business miles.

All documentation to prove your business miles and other vehicle expenses should be kept for three years after the due date of the return.