Adoption Tax Credit Q&A With a CPA

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There are a few tax strategies that can help offset the cost of your adoption, with the adoption tax credit being the biggest one. I sat down with CPA and adoption tax credit expert Natalie Kubik to find out how it works, little-known facts about the credit and more.

How much is the adoption tax credit?

At the time of this writing, the credit is $13,400, typically adjusted for inflation for future years. This amount is per eligible child; it is not an annual limit. This amount begins to “phase out” for taxpayers with adjusted gross incomes between $201,010 and $241,010, which means their available credit begins to decrease. See Topic 607 on the IRS website for the most up-to-date credit amounts and phase-out levels.

How does a ‘tax credit’ like the adoption tax credit work?

A credit offsets your tax liability, or how much you owe the IRS. It isn’t a refund, but rather, it allows you to reduce what you owe to the IRS. Depending on your individual tax situation, it could reduce your liability to $0, resulting in no payment due to the IRS, or the return of your tax payments and withholdings for the tax year, if you made any. If your tax liability is less than your available credit, you can carry forward the credit on future tax returns for up to five years until you have used all of it or it expires.

For example: Your tax liability for 2015 is $5,600, and you have the full credit of $13,400 available to you. You can use the credit to reduce your liability to $0 for 2015, which would mean you owe the IRS nothing, either resulting in no payment due or in the return of the tax payments and withholdings you made during the tax year, if any. The following year, you can apply the additional $7,800 worth of credit to reduce your liability for that year. And so on until you have used all of the credit (within the five-year carryforward limit).

Who and what is eligible for the adoption tax credit?

Anyone who adopts a child under 18 or a person physically or mentally unable to care for himself or herself is eligible for the credit.

In the case of special needs adoption, tax filers are eligible for the full credit even if they had no expenses, or if their expenses were less than the credit.

Eligible expenses include:

  • Adoption fees
  • Attorney fees
  • Court costs
  • Related travel expenses, meals and lodging
  • Other expenses directly related to the adoption of the child

Non-qualifying expenses include:

  • Expenses paid using funds from or reimbursed by an employer or governmental agency
  • The adoption of a spouse’s child
  • Surrogate parenting arrangements
  • Expenses allowed as a credit or deduction under another tax provision
  • Expenses violating state or federal law

When should adoptive families file for the credit?

Expenses paid in … File the credit in …
Any year before the adoption becomes final The year after the year of the expense
The year the adoption comes final The tax year that the adoption becomes final
Any year after the year the adoption becomes final The tax year of the expenses

What else should filers know about the adoption tax credit?

  • Although it seems pretty straightforward, filing for the credit yourself is not easy. I’ve even had clients who use tax professionals who couldn’t figure it out because they weren’t well versed in the adoption tax credit.
  • I mention this again because it’s such a little-known benefit of the credit: In the case of special needs children, filers are eligible for the full credit even if no expenses were incurred.
  • The credit can be claimed for adoption efforts that don’t become final. However, if you begin the adoption process with one attempt and ultimately finish it with a different attempt, the IRS considers this one adoption attempt, so expenses would fall under one tax credit.

What if a family hasn’t received birth documents in time for April 15?

If your child doesn’t yet have a Social Security number, you can either file an extension on April 15, or apply for an Adoption Taxpayer ID Number (ATIN)  that can be used to file your return. Be sure to file in advance of the tax deadline, as it takes four to eight weeks to come in. Note that when you file for an ATIN, you must use your child’s given name at birth.

Even if you don’t need an ATIN for your return, you may want to consider filing for one as a precaution against fraud for your child.

Are there any other tax strategies available to help offset adoption costs?

Not specifically for adoptive families, but I like to remind my clients that all parents can realize tax savings from deductions such as claiming the child as a dependent and using the child and dependent care credit, which allows you a credit of up to $3,000 (or $6,000 for two or more children) for eligible child care expenses.

Natalie Kubik is a Houston-based CPA and adoption tax credit specialist who serves adoptive families all over the country. She can be reached at 713.554.9435 or natalie@njkcpa.com. For more information, visit her website.


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