Becky Wilmoth is an Enrolled Agent and Registered Tax Return Preparer and Adoption Tax Credit Specialist® with Bills Tax Service, licensed in all 50 states. Expert on the Adoption Tax Credit and speaker at national adoption conferences, Becky has helped hundreds of families successfully claim the Adoption Tax Credit..
The top two questions I am often asked about the Adoption Tax Credit is how does it work and can it actually help me? Whether you are adopting through the foster care system, privately, domestically, or internationally, the Adoption Tax Credit can be an important part of helping families adopt.
An adoptive family can apply this credit toward their federal tax liability when they file their tax return. Meaning, it can reduce what they owe in federal income taxes for the year. It is not a refundable tax credit; however, it is still a great credit at $13,400 for 2015 and $13,460 for 2016. The credit will be indexed for inflation for the years following. Since it is not refundable at this time, it will not cover self-employment tax, early pension distribution penalty, or first-time homebuyer payback.
Who qualifies for the credit?
1. You qualify for the Adoption Tax Credit if you adopted a child (except spouse’s child) and paid out-of-pocket expenses relating to the adoption. The amount of the tax credit you qualify for is directly related to how much you spent on adoption-related expenses. Income can also be excluded as taxable through an employer-provided adoption benefit program. Both a credit and exclusion may be claimed for the same adoption; however, both cannot be claimed for the same expense.
2. If you adopt a special needs child through foster care, you may be entitled to claim the full amount of the adoption credit. Each state has different criteria that qualify a child as special needs. The special needs declaration must come from the state in which the adoption was final. The “Subsidy Agreement” has the determination of special needs that the IRS accepts. Some states call it the “Adoption Eligibility Assistance Determination.”
3. No international adoption is considered special needs for IRS purposes, so it will be for amount of qualified expenses only.
How does the Adoption Tax Credit work?
1. On Line 44 of your Federal 1040 shows your tax liability. The difference between your tax liability and your federal withholding is either what you get as a refund or what you owe when you do your tax return.
2. The Adoption Tax Credit comes in on Line 54 from Form 8839 and takes care of your tax liability up to $13,400 for 2015. You will get your withholding back and child tax credit drops down to additional child tax credit (if you qualify).
3. If you do not use all of the credit in the first year you can carry it forward for up to 5 years.
4. In the event it does become refundable again you will get the remaining amount you have not used as a refund.
What documentation should I keep for the IRS?
1. Final Judgment of Adoption (all adoptions).
2. Adoption Assistance Eligibility Determination (Subsidy Agreement) that declares the child special needs, if claiming credit for a child declared special needs by your state through foster care (foster adoptions).
3. A home study/placement agreement completed by an authorized placement agency (all adoptions except foster).
4. All documentation of paid qualified expenses (all adoptions except foster).
5. All documents must be signed and dated. (all adoptions) The IRS will not accept any Home study/Placement agreement, Judgment of Adoption, or Subsidy agreement/Eligibility agreement without it being signed and dated by the proper authorities.
To speak to an Adoption Tax Credit Specialist®, email or call us at 1-888-7ADOPT0.