Adoption Tax Credits

Adoption Tax Credits Q&A

If you are considering adoption or in the process of adopting, you have probably heard about the Adoption Tax Credit. This is one of the most misunderstood and confusing aspects of adoption. Although it's not refundable, the Adoption Tax Credit still works to provide much needed financial assistance to adoptive families each year.  Adoption Circle strongly encourages adoptive families to reach out to their tax advisor to see how the Adoption Tax Credit to may apply to them. The information below is a general overview of frequently asked questions regarding the Adoption Tax Credit. 

What is the Adoption Tax Credit?

The Adoption Tax Credit is a non-refundable Federal (IRS) income tax credit available to adoptive parents for qualifying expenses paid in connection with an adoption. In addition to the tax credit, taxpayers who receive payments from an employer for adoption assistance may be able to exclude such payments from their taxable income.

What Does a Tax Credit Mean?

A tax credit is a dollar for dollar reduction of your tax liability. This is different from a tax deduction which is a reduction of taxable income.  A tax credit is more valuable to a taxpayer since it provides dollar for dollar savings vs. a deduction which provides savings of only a percentage (15/25%, etc) of the deduction.

Who is Eligible to Claim the Adoption Tax Credit?

The credit applies to all types of adoption (except step-parent adoption), including:

  • International adoptions
  • Domestic agency and private adoptions
  • Public foster care adoptions

If your family adopts internationally, once the adoption is legally finalized, either in the U.S. or in the child’s home country, you can claim your qualified adoption expenses, up to the maximum.

Families who adopt children with special needs can claim the maximum credit regardless of whether they have qualified adoption expenses or not. A special needs adoption is one in which the state or county child welfare agency has determined that the child is not likely to be adopted unless the government provides assistance to the adoptive family. The special needs determination is almost exclusively for foster children and many foster children are considered special needs.

If you’re not a CPA, you’re probably unfamiliar with the requirements of the Federal Adoption Tax Credit and the process can be confusing. During the 2012 filing season, 69% of all adoption tax credit claims were selected for audit.

Whether you’re working with a tax professional or filing on your own, be sure that you understand how the Adoption Tax Credit applies to your adoption and follow these 10 steps to minimize the likelihood of an audit when claiming the Adoption Tax Credit.

Source: http://fundyouradoption.tv/adoption-tax-credit/

What is the Maximum Credit Amount?

For 2017, the maximum adoption credit and exclusion is $13,570 per child. The amount changes each year to adjust for inflation. The credit will begin to phase out for families with modified adjusted gross incomes above $203,540 and the credit will go away completely for those with incomes around $243,540.

Since the credit is per child, the maximum you claim depends on the number of children you adopt. If you adopt two children in 2017, your maximum is $13,570 x 2 or $27,140. If you adopt four children, the maximum is $13,570 x 4 or $54,280.

Adoption Tax Credit Amounts
2017: $13,570 non-refundable
2016: $13,460 non-refundable
2015: $13,400 non-refundable
2014: $13,190 non-refundable
2013: $12,970 non-refundable
2012: $12,650 non-refundable

*The credit was only refundable in 2010 and 2011. A refundable credit is one that a person can receive regardless of their tax liability. It is viewed as a payment so the parents can receive a refund larger than any taxes they have paid in during the year.

Adoption Tax Credit Income Phase-out Ranges
2017: $203,540 – $243,540
2016: $201,920 – $241,920
2015: $201,010 – $241,010
2014: $197,880 – $237,880
2013: $194,580 – $234,580
2012: $189,710 – $229,710

Source: http://fundyouradoption.tv/adoption-tax-credit/

What Does it Mean That the Credit is Not Refundable?

A non-refundable credit is one in which taxpayers receive a refund of federal income taxes, but only up to the amount of taxes they otherwise had due. In one year, taxpayers can use as much of the adoption tax credit as the full amount of their federal income tax liability, which is the amount on line 46 of the Form 1040 less certain other credits (such as the Child Tax Credit). Even those who normally get a refund may still have tax liability; with the adoption tax credit the taxpayer could get a larger refund.

Families who have lower or moderate incomes typically have no tax liability and will not benefit from a non-refundable credit. We still encourage families who don’t think they have a tax liability to file for the credit (Form 8839), in case families’ tax liabilities change in future years.

In recent years, there has been a major political push to make the credit permanently refundable. However, no legislation has been passed and the Adoption Tax Credit is not refundable in 2017.

Here is a very simple example of how the Adoption Tax Credit works. A family has $5,000 in federal income taxes withheld from their paychecks during the year. When they do their taxes, they look at the tax tables and based on their adjusted gross income, their federal income taxes are $1,000 (this is their tax liability). If there were no adoption credit, they would be due a refund of $4,000. The family had qualified adoption expenses of $8,000. Because of the adoption credit, they would receive an additional $1,000 refund for that tax year (reducing their tax liability to zero), meaning that they get the full $5,000 that was withheld back rather than just the $4,000 they would have gotten without the non-refundable credit.

They can carry the remaining $7,000 ($8,000 in expenses minus the $1,000 they received) forward to future years and receive additional refunds depending on their tax liability in future years. (See more on the carry forward below).

Source: http://fundyouradoption.tv/adoption-tax-credit/

How Much of the Credit Can Parent Claim?

For other adoptions (other than step-parent adoptions, which are not eligible for the credit at all), parents can claim the credit for qualified adoption expenses up to the maximum. So if a family has $5,000 in expenses for a private, non-special needs adoption, they can claim only that $5,000 not the maximum. Families who have expenses above the maximum can only claim the maximum. So if a family has expenses of $30,000 for a 2013 adoption of two children, they will be able to claim only $25,940 ($12,970 per child), as long as their income is below the phase-out limits listed above.

In all cases, how much a parent will actually receive in a given year depends on their tax liability.

Source: http://fundyouradoption.tv/adoption-tax-credit/

 

When Can the Credit Be Claimed?

It depends on the type of adoption.  Taxpayers with foreign and special needs adoptions cannot claim the credit until the year it becomes final.  Taxpayers with domestic, non-special needs adoptions, in some cases can claim the credit in a year prior to finalization.  A tax professional can help you determine when you are allowed to claim the credit.

What is a Special Needs Adoption?

A special needs adoption is one in which the state or county child welfare agency has determined that the child is not likely to be adopted unless the government provides assistance to the adoptive family. The special needs determination is almost exclusively for foster children, and a significant majority of foster children are considered special needs.

Children who are determined to be special needs are typically older, are part of sibling groups that will be placed together with one family, or have physical, emotional, or mental disabilities. All children adopted from foster care with an adoption assistance agreement (also referred to as adoption subsidy agreement) from their state or county are considered special needs for purposes of the tax credit.

Just because a child is disabled does not mean the child is special needs under the tax credit. No child adopted internationally is considered special needs for the adoption tax credit. Not even every child adopted from foster care is considered special needs (about 10% of children adopted from care do not receive adoption assistance support). Those who do not have an adoption assistance agreement are not special needs.

Simply meeting the state’s definition of special needs is not sufficient. The state or county child welfare agency must have made an active determination that the child is considered special needs, and an adoption assistance agreement must be in place. (For example, if a parent privately adopts three siblings from a family member with no child welfare involvement, those children are not considered special needs even though a sibling group of three adopted from foster care would meet the special needs definition.)

Source: http://fundyouradoption.tv/adoption-tax-credit/

 

What Expenses Qualify for the Credit?

Adoption agency fees, attorney fees, court costs, travel expenses (including meals & lodging) while  away from home, and finger-printing/background check costs, are all qualifying expenses.

There may be other costs you incur in your adoption that may qualify for the credit.

Can I Adjust my Tax Withholding at Work to Plan for the Credit?

Yes, you can change your withholding to have less tax taken out throughout the year, as opposed to waiting and getting a big refund at the end of the year.

Use Form W-4 to adjust your withholding to the appropriate levels to account for the Adoption Tax Credit.

Can We Claim the Adoption Credit if We File Separately?

No, married taxpayers generally must file a joint return to claim the credit.

Are There Individual State Tax Deductions?

You may be eligible for deductions within your state of residence. Be sure to check with your tax advisor for details. For additional information, contact your State Adoption Specialist at The Child Welfare Information Gateway.

What are Some Adoption Credit Resources?

Fund Your Adoption  provides exceptional tools and resources that teach families how to adopt without debt. 

North American Council on Adoptable Children (NACAC) includes an assortment of information about the Adoption Tax Credit and how to claim it.

AdoptionTaxCredit.org provides information about the Adoption Tax Credit and a long list of FAQs.

Top 10 Facts About Adoption Benefits is a quick cheat sheet to help you better understand the Federal Adoption Tax Credit.

Topic 607 – Adoption Credit and Adoption Assistance Programs gives examples of tax benefits for adoption when receiving employer-provided adoption assistance.

IRS Form 8839 and the accompanying instructions.

*This material was provided by Jim All, an adoptive parent and CPA in the Columbus area.  He has prepared many tax returns for adoptive parents.   He can be reached at jall@jamisoncpa.com or at (614) 794-1771.

*The information above was also gathered from the article "The Adoption Tax Credit 2017 And What you Need to Know" on the Fund Your Adoption Website (http://fundyouradoption.tv/adoption-tax-credit/).

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