Adoption Tax Credit Q&A

The Adoption Tax Credit is a great way to support adoptive families. You don't need be a tax expert to understand the basics of this credit, which thousands of families claim every year. We asked Becky Wilmoth, Adoption Tax Credit Specialist^® from Bills Tax Service, to shed some light on the ATC. Here are her answers to 12 common questions.

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 the taxpayer’s tax liability up to the maximum amount of the credit.*  It increases their refund because they generally get their withholding back and the child tax credit.

*editor's note - for the year 2020, the maximum credit is $14,300.

2. What Are Qualifying Adoption Expenses?

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

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

No

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.

5. 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.

6. How many families do you annually get that use the Adoption Tax Credit?

We personally do hundreds of Adoption Tax Credit returns in our office every year. IRS statistics show only 66,250 tax returns claimed the Adoption Tax Credit for tax year 2016 (filed in 2017). With over 100,000 children adopted each year, we still have a lot of work to do!

7. 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 their income is too high the year the adoption was final, they are disqualified all together. It can only be carried forward if they are eligible to claim it the first year, then the remainder can be carried forward up to 5 years.

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

It depends on the type of adoption. Foster care and intercountry adoptions must be final before you are able to claim the Adoption Tax Credit. Domestic adoptions can either take the credit when the adoptions are final or the tax year following expenses being paid.

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

Final Judgment of Adoption(All Adoptions), Subsidy Agreement declaring the child special needs according to their state(Foster Only), Homestudy(Domestic and International), and receipts of all expenses(Domestic and International).

10. 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 documentation to be requested by the IRS since that social security number has already been used to claim the Adoption Tax Credit.

11. 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 go against your next successful one.

12. 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. However, if your income is over $254,520 in the year you should claim the adoption tax credit you are not eligible to take it that year or any other years either.