The adoption tax credit applies to all adoptions, including private adoption and special needs adoption, with the exception of a stepparent adoption.
Qualified Expenses
The adoption tax credit is supposed to cover the cost of some expenses, known as “qualified expenses.” These include court, attorney and adoption fees along with any traveling expenses involved in the adoption. The IRS also allows other related expenses as long as they are specifically for the adoption.
This is not limited to costs related to a specific child. An adoption home study or other costs incurred before the process of adopting a certain child is underway can count as a qualified adopted-related expense.
Any amount that you are reimbursed for by your employer or an organization does not qualify.
The adopted child must be either younger than 18 or unable to care for themselves because of mental or physical disabilities. Older children may turn 18 before you are able to file for the credit, but this does not affect your ability to claim it.
Adoption Credit and Income Limits
In 2020, the adoption credit is a maximum of $14,300 per child adopted, with no limit for tax purposes on the number adopted.
For tax year 2020, if your modified adjust gross income is at least $254,520, you do not qualify for the adoption tax credit. If your MAGI is between $214,520 and $254,520, your credit will be reduced.
If you adopted the child of your unmarried partner, this is not considered a stepparent adoption, so you could claim the credit for any qualified adoption expenses.
Nonrefundable Credit
The adoption credit is nonrefundable. This means that you can only get up to the total amount of your federal tax liability. Your tax liability is how much you owe in taxes for the calendar year.
If your income is low enough that you do not have a federal tax liability, this credit may not benefit you. However, whether or not you think you are eligible for it based on your tax liability, you should go ahead and file for it. The reason for this is that the credit may be carried forward for six years or until it is used up, whichever comes first. This means that if there is a change in your tax liability at some point, you could then benefit.
Adoption expenses in one calendar year in which the adoption is not finalized are claimed when you file the taxes for the following year. For example, if you first incurred expenses in 2018, then when you filed your 2019 taxes, you would claim the credit.
However, expenses from the year in which the adoption is finalized are claimed in the same year.
For example, you might first incur expenses in 2018 for a private adoption that is not finalized until 2020. In this situation, you could use the credit for the first time on your 2019 tax return.
Expenses from 2019 and 2020 could be included in the 2020 return that you file in 2021.
You need Form 8839 to file for the credit.
Determining Your Credit
If your tax liability is $6,000 and you had $8,000 withheld from your taxes, you are supposed to get a refund of $2,000.
However, you might have adopted one child at a cost of $10,000 in adoption expenses. With this, you could reduce the total that you owed in taxes to $0. You could therefore get a full refund of the taxes paid rather than just the $2,000, and you could carry the remaining amount forward to the following year or years.
Maximum Claims
As long as you qualify under the income limits for the maximum of $14,300, you can claim that. However, if your adoption expenses were $20,000, you can still only claim the $14,300 maximum.
If you adopt a special needs child, you can claim the maximum regardless of what your expenses were and even if you had no expenses.
Special Needs Child
A child that the local or state welfare agency has deemed “special needs” does not necessarily have a mental or physical disability. This simply means that the child is hard to place.
To qualify as a special needs child, three factors must be in place. When the adoption process begins, the child must be a resident in the United States or its possessions. There must have been a determination that the child cannot be returned to their home. Finally, there must have been a determination that the child will only be adopted if the parents get special assistance. Elements that may be considered are mental or physical handicaps, the age of the child, the child’s race or other factors.
However, not every child who has a physical disability or medical condition is considered special needs for the purposes of the IRS.
Adoption Subsidy or Assistance
The payment associated with special needs children might come in several different forms. It could be a monthly recurring benefit, but other forms of assistance also qualify.
The adoption assistance program might provide the child with Medicaid, or it might reimburse you for adoption expenses that are not recurring.
The child can only be considered a special needs child with an adoption assistance agreement and if they get benefits from the adoption assistance program.
Documentation Needed
To claim a regular adoption tax credit in 2020, you do not need to provide documentation, but it is not a bad idea to hang onto it in case of a later audit.
For a special needs child, you do need to keep a copy of the adoption assistance agreement.
Failed Adoption
There may be situations in which you start the adoption process, but ultimately, it does not go through.
In this case, you can still claim qualified expenses. This is treated in the same way as an adoption that has not yet been finalized. Therefore, once again, if you incurred the expenses in 2018, you would claim them on your 2019 tax form.
Multiple Adoption Attempts
The situation gets slightly more complicated if your first effort at adopting a child fails and you then attempt to adopt another child. You cannot claim the credit a second time or even if you try a third and a fourth time. In this situation, you might claim all your expenses on the “Child One” line.
However, if you successfully adopt one child and then set out to adopt another or if you were trying to adopt two children, you could claim the second child on the “Child Two” line. This is also the case for any additional children.
Essentially, all unsuccessful attempts count as one child until an adoption is finalized.
Failed Special Needs Adoptions
You only get the maximum credit for a successful special needs adoptions. For failed ones, the expenses are treated the same as for any other adoption of a U.S. child, meaning that you can only claim as much as you spent.
Providing Additional Information For a Failed Adoption
For an adoption that ultimately was not successful or for one that is still in progress, you may not have all the information that you need for the child, such as the child’s identifying number. If this happens, you will not be able to file electronically. You will need to include a statement with your return that includes the agent or agency that helped you with the failed adoption or the adoption that is still in progress.
Employer Benefits
Your employer might have an approved adoption assistance program that reimburses a certain amount. You can exclude the amount provided by your employer from your taxable income. You can then claim any remaining expenses from the adoption credit.
If you adopt a special needs child, you can still claim the maximum amount even if you also get employer reimbursement through their qualified adoption assistance program.
Contact an adoption attorney
If you have questions about the adoption process, speak to a qualified adoption lawyer at Gulf Coast Adoptions. We are available 24/7 at 850-999-7977 and can be reached through our online contact form.