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Adoption Tax Credit Questions

June 1, 2021

Elise Lowe

Adoptive Parents

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Adoption Tax Credit Questions

NCFA has been a strong advocate of the Adoption Tax Credit (ATC) since its inception, as a fiscally responsible way to help more American families who want to provide a permanent, loving home to children in the U.S. and around the world. You don't need be a tax expert to understand the basics of this credit, which thousands of families claim every year. We’ve put together a list of frequently asked questions to help you get started!

General Information

1. How much is the adoption tax credit?

For adoptions finalized in 2020 (tax returns claimed in early 2021), the maximum amount a family can receive as credit is $14,300.

2. What is the difference between a tax credit and a tax deduction?

A tax credit is generally preferable to a tax deduction; as a credit is directly subtracted from the tax you owe, while a deduction only reduces the amount of taxable income.

3. When can adoptive parents claim the adoption tax credit?

The timing of claiming the tax credit depends on the type of adoption. Foster care and intercountry adoptions must be final before you are able to claim the Adoption Tax Credit. In a domestic adoption, parents can either file for the credit when the adoption is final or in the tax year following the expenses being paid.

4. How is the credit impacted if a family adopts more than one child during the same tax year?

The adoption tax credit is calculated on a per child basis, so qualifying families who adopt multiple children will have the credit applied on a per child basis.

5. What paperwork from my adoption is needed when I file for the tax credit?

All Adoptions: Final Judgement of Adoption

Adoptions from Foster Care: Subsidy Agreement declaring the child to have special needs according to the criteria of their state

Domestic and Intercountry Adoptions: Home study, receipt of all qualifying expenses

Tax Liability and Income Eligibility

1. How does the adoption tax credit work? Does it increase potential refund or does it just help pay anything that adoptive parents might owe?

The Adoption Tax Credit covers taxpayers’ tax liability up to the maximum amount of the credit. For most families, The Adoption Tax Credit increases their refund because they generally get their withholding back and child tax credit becomes additional child tax credit once their tax liability has been covered.

2. Does the adoption tax credit just reduce my federal tax liability, or does it also reduce my state tax liability?

This information focuses on federal tax benefits. Many states do have an adoption tax benefit in addition to the federal tax credit. These state benefits can be claimed when filing state tax returns.

3. What is the income eligibility criteria for the adoption tax credit?

The income phase-out ranges for 2020 are $214,520 - $254,520. As long as the taxpayer’s Modified Adjusted Gross Income is under the limit, they are eligible if they meet all of the other criteria.

4. How is the adoption tax credit related to an individual's tax withholdings?

Some taxpayers adjust their withholding on their W-4’s when they know they have the Adoption Tax Credit to cover their tax liability.

Qualifying Expenses

1. What Are Qualifying Adoption Expenses?

Qualified expenses are any expenses necessary for the adoption. For example, court fees, agency fees, attorney fees, dossier, travel and meals, and any other expenses that are required. The only adoption expenses that do not qualify are birth mother expenses.

2. Are temporary foster care expenses prior to finalizing adoption considered Qualified Adoption Expenses (e.g. childcare, clothing, furnishings, lodging, food, etc.)?

No

3. If a child was adopted through the State and though the parents did not have any expenses, the child does receive adoption subsidy and is considered special needs. Do the parents qualify?

Yes, if a child is declared special needs according to that state’s criteria they will qualify for the full amount of the credit with no expenses necessary.

Unique Situations

1. How does the Adoption Tax Credit work with carry forward of the credit from prior years if your income was too high the first year, but is below the cut off limit for this year? Can you take the adoption tax credit?

If an income is too high to receive the credit in the first year the adoption was final, then the family is disqualified from receiving the credit all together. It can only be carried forward if they are eligible to claim the credit in the first year. In that case, the remainder can be carried forward for up to 5 years.

2. If a family is looking into a second chance adoption of a child from a family who had previously adopted a child and already received the adoption tax credit, can they receive an adoption credit for the same child?

Yes, but please be prepared for additional documentation to be requested by the IRS since that social security number has already been used to claim the Adoption Tax Credit.

3. Do families who experience an adoption disruption still qualify for the adoption tax credit?

You can claim the Adoption Tax Credit for domestic adoptions that have failed or are not final. However, whatever credit you receive will be subtracted from what would be able to be received after your next successful domestic placement.

The Future of the ATC

1. Why does the adoption tax credit amount change from year to year?

The amount of the credit is adjusted for inflation each year. The eligibility restrictions based upon taxpayers’ modified adjusted gross income (MAGI) are also adjusted for inflation each year. The maximum amount a family can receive has increased each year over the past several years.

Maximum Adoption Tax Credit Per Year:

2020 $14,300
2019 $14,080
2018 $13,810
2017 $13,570
2016 $13,460

2. Because the credit is now permanent, does that mean it cannot go away in the future?

No, when a credit is said to be permanent, it means it is not scheduled to “sunset” or be terminated. However, future legislation could eliminate this credit or alter the credit in positive or negative ways.

Additional Resources on the ATC:

IRS Adoption Credit and Adoption Assistance Programs

Understanding the Adoption Tax Credit: Adoption Advocate

The Need for Adoption Tax Credit Refundability

Sources:

Internal Revenue Service (2021). Topic No. 607 Adoption Credit and Adoption Assistance Programs. https://www.irs.gov/taxtopics/tc607

North American Council on Adoptable Children. (2020, February). Adoption Tax Credit. https://www.nacac.org/help/adoption-tax-credit/

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