Frequently Asked Questions about the Adoption Tax Credit
Below are some of the questions NACAC gets asked most frequently. The first set is for people who have already filed for the credit. The second is for those who haven’t yet filed.
2012 and 2013 Adoptions
What is the maximum amount of the credit for 2013? At what income level does the credit begin to phase out?
For 2012 (claimed in early 2013), the maximum adoption credit and exclusion is $12,650 per child. The credit will begin to phase out for families with modified adjusted gross incomes above $189,710 and the credit will go away completely for those with incomes around $229,710.
For 2013 adoptions (claimed in early 2014), the maximum adoption credit and exclusion $12,970 per child. The credit will begin to phase out for families with modified adjusted gross incomes above $194,580 and the credit will go away completely for those with incomes around $234,580.
Since the credit is per child, the maximum you claim depends on the number of children you adopt. If you adopt two children in 2012, your maximum is $12,650 x 2 or $25,300. If you adopt four children, the maximum is $12,650 x 4 or $50,600. For purposes of the tax credit, there is no limitation on the number of children you can adopt.
Is the credit refundable for 2012 or future years?
No. The credit was only refundable for tax years 2010 and 2011. A refundable credit is one that a person can receive regardless of their tax liability (see definition further below). It is treated as a payment so the parent can receive a refund larger than any taxes they have paid in during the year.
Can I receive the credit if I adopted a child from another country?
Yes, once the adoption is legally finalized, either in the child’s home country or in the U.S., you can claim your qualified adoption expenses, up to the maximum.
Is the tax credit for all adoptions or just special needs? Can I receive the credit if I adopted a healthy child? What kinds of adoptions benefit from the tax credit?
The adoption credit is for all adoptions other than stepparent adoptions (international, domestic private, and public foster care). See below for more information about how special needs adoptions are different.
How much of the credit can a parent claim?
Parents who adopted a child who has been determined to be special needs by the state or county child welfare agency (see next question for special needs definition) can claim the maximum credit regardless of whether they have qualified adoption expenses at all.
For other adoptions (other than stepparent adoptions, which are not eligible for the credit at all), parents can claim the credit for qualified adoption expenses up to the maximum. So if a family has $5,000 in expenses for a private, non-special needs adoption, they can claim only that $5,000 not the maximum. Families who have expenses above the maximum can only claim the maximum. So if a family has expenses of $30,000 for a 2013 adoption of two children, they will be able to claim only $25,940 ($12,970 per child), as long as their income is below the phase-out limits listed above.
In all cases, how much a parent will actually receive in a given year depends on their tax liability (see below).
What constitutes a special needs adoption?
Special needs really means hard to place, not that the child has a disability or medical condition. Basically a child must be a child who receives adoption subsidy/assistance (or reimbursement of nonrecurring adoption expenses or Medicaid through the adoption assistance program). The IRS instructions for Form 8839 say, “A child is a child with special needs if all three of the following statements are true.
The child was a citizen or resident of the United States or its possessions at the time the adoption effort began (US child).
A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents' home.
The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. [emphasis added by NACAC] Factors used by states to make this determination include:
The child's ethnic background and age,
Whether the child is a member of a minority or sibling group, and
Whether the child has a medical condition or a physical, mental, or emotional handicap.”
Again, many children who have disabilities or medical conditions do not meet the statutory definition of special needs. These parents will need to have and document qualified adoption expenses to claim the credit.
If my child doesn’t receive a monthly adoption assistance benefit is my child considered special needs?
You do not need to receive a monthly payment to qualify as special needs as long as you receive either reimbursement of non-recurring adoption expenses or Medicaid through the adoption assistance program. The child must receive benefits through the adoption assistance program.
What does it mean that the credit is not refundable?
A non-refundable credit is one in which taxpayers receive a refund of federal income taxes, but only up to the amount of taxes they otherwise had due. In one year, taxpayers can use as much of the adoption tax credit as the full amount of their federal income tax liability, which is the amount on line 46 of the Form 1040 less certain other credits (such as the Child and Dependent Care Expenses). Even those who normally get a refund may still have tax liability; with the adoption tax credit the taxpayer could get a larger refund.
Families who have lower or moderate incomes typically have no tax liability and will not benefit from a non-refundable credit. We still encourage families who don’t think they have a tax liability to file for the credit (Form 8839), in case families’ tax liabilities change in future years (see more below under “carry forward”).
Here’s a very simplified example: A family has $5,000 in federal income taxes withheld from their paychecks during the year. When they do their taxes, they look at the tax tables and based on their adjusted gross income, their federal income taxes are $1,000 (this is their tax liability). If there were no adoption credit, they would be due a refund of $4,000. The family had qualified adoption expenses of $8,000. Because of the adoption credit, they would receive an additional $1,000 refund for that tax year (reducing their tax liability to zero), meaning that they get the full $5,000 that was withheld back rather than just the $4,000 they would have gotten without the non-refundable credit.
They can carry the remaining $7,000 ($8,000 in expenses minus the $1,000 they received) forward to future years and receive additional refunds depending on their tax liability in future years. (See more on the carry forward below.)
Is the credit a deduction?
No, the credit is not a deduction. The credit is a dollar for dollar reduction in the amount of federal taxes owed for the year.
What is tax liability?
It is the amount of federal income tax that you owe the IRS for the year. If you did your taxes manually, it’s the amount you look up in the tax table based on your adjusted gross income.
You can get a refund and still have tax liability; a refund simply means you paid in more than you owe. It’s not really this simple but the general idea is that if your employer withholds $5,000 in federal income tax during the year and you get a refund of $3,000, your tax liability was the $2,000 that the IRS keeps in federal income taxes.
Can the credit be carried forward if I don’t have enough tax liability the first year I claim it?
Yes, taxpayers have a total of six years to use the credit—the year they first are eligible to claim it and the next five years.
We encourage adoptive families who file taxes to include a Form 8839 to establish the adoption tax credit even if they do not believe they will be able to use any of the credit this year. Families may have tax liability in future years and establishing the credit would save them from having to go back and amend taxes once they were able to benefit.
Does a parent who adopted a child with special needs still have to have tax liability?
Yes, the only difference for special needs adoptions is that parents can claim the maximum credit regardless of whether they had any adoption expenses at all. The credit is still non-refundable for special needs adoptions.
I already claimed the credit for an earlier adoption and received the refund. Do I get to claim it again?
Not unless you adopted again. The credit is a one-time credit per child. If you adopt again, you are definitely eligible to claim another adoption tax credit for that child (or children).
If you never filed for the credit, but adopted in 2005 or more recently, you may still be able to benefit depending on your personal tax situation. See below for more information.
When can I claim the credit?
If it is an international or special needs adoption (without qualified adoption expenses), you apply for the credit in the tax year in which you finalize the adoption. For domestic, non-special needs adoptions, you must claim any expenses either the year you finalize or, for non-finalized adoptions, the year after you spent the money. So if you finalized an adoption in 2012, but had expenses from 2009 to 2012, you can claim the 2009 expenses with your 2010 tax return (typically filed in early 2011), the 2010 expenses with your 2011 tax return, and the 2011 and 2012 expenses with your 2012 tax return. The maximum credit will be based on the year of finalization.
You cannot claim the credit for a non-finalized international adoption. If you had a domestic adoption that did not finalize you can claim expenses but only the year after you spent them (2009 is claimed with 2010 tax return). For failed U.S. special needs adoptions, you can only claim any expenses you had (not the maximum credit), and again you would have to wait until the year after you had the expenses.
I got a placement in 2012 but haven’t finalized yet (or fina
ized in 2013). When can I claim it?
For private domestic adoptions, expenses incurred in 2011 for a non-finalized adoption can be claimed with 2012 taxes. Expenses from 2012 cannot be claimed until 2013 taxes are filed. If the adoption finalizes in 2013, parents can claim 2012 and 2013 expenses with their 2013 taxes filed early next year.
How do I apply?
You need to fill out a Form 8839 for 2012 and include it with your Form 1040.
Can I take the credit every year?
No, it is a one-time credit per child. If you adopted in 2010 or 2011 when the credit was refundable, you take the credit that year and are finished. If you adopted in an earlier year, you claim the credit in the year of finalization, or prior to finalization of domestic adoption with qualified adoption expenses. You then use the credit that year and in later years until it is all used up or a total of six years have passed.
The one exception is if you have expenses for a non-finalized U.S. adoption, you claim those the year after you had the expenses. Then if you finalize the next year, you can claim the remainder of the credit in that subsequent year.
Is there a limit to the number of credits I can claim if I adopted multiple children?
No. You can claim it for any adopted children (other than a step-child). You just use multiple copies of the form.
What documentation is required?
No documentation is required for 2012 tax year (since the credit is not refundable).
What are qualified adoption expenses?
The IRS writes:
“Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.
Qualified adoption expenses include:
- Adoption fees,
- Attorney fees,
- Court costs,
- Travel expenses (including meals and lodging) while away from home, and
- Re-adoption expenses relating to the adoption of a foreign child.
Qualified adoption expenses do not include expenses:
- For which you received funds under any state, local, or federal program,
- That violate state or federal law,
- For carrying out a surrogate parenting arrangement,
- For the adoption of your spouse's child,
- Paid or reimbursed by your employer or any other person or organization, or
Allowed as a credit or deduction under any other provision of federal income tax law.”
Can I claim the credit for a failed adoption?
Yes if it is a U.S. adoption and you had qualified adoption expenses. It is treated as a non-finalized adoption, and you must wait one year after you incur the expenses. So, if you had expenses for an adoption in 2011 but the adoption has failed, you claim them with your 2012 taxes filed in early 2013.
I had a failed U.S. adoption but later adopted successfully. Can I claim the credit twice?
No. The instructions for Form 8839 state:
Attempted Adoptions of U.S. Children
If you made more than one attempt to adopt one eligible U.S. child, combine the amounts you spent and complete only the “Child 1” line. Do not report the additional attempt(s) on the “Child 2” or “Child 3” line. Complete the “Child 2” or “Child 3” lines only if you adopted or tried to adopt two or three eligible children.
You planned to adopt one U.S. child. You had one unsuccessful attempt to adopt a child and later successfully adopted a different child. Complete only the “Child 1” line because you made more than one attempt to adopt one eligible child.
I had a failed international adoption. Can I claim the credit?
No. To claim any credit for an international adoption, the adoption must be finalized.
I had a failed adoption of a child with special needs. Can I claim the maximum credit without expenses?
No. If you had expenses related to the adoption process, you could claim them in the tax year after you incurred the expenses.
If I’m claiming the credit for a non-finalized or failed US adoption, what do I use for the child's indentifying number?
If you cannot give complete information about an eligible child you tried to adopt the year before because the adoption was either unsuccessful or was not final by the end of the year, complete the entries that you can on line 1. Enter "See Attached Statement" in the columns for which you do not have the information. Then attach a statement to your return, providing the name and address of any agency or agent (such as an attorney) that assisted in the attempted adoption. Be sure to write your name and social security number on the statement.
Adoption Tax Credit for 2010 and 2011
Does my income matter?
You do not have to have any income to claim any credit you would be due in 2010 or 2011 since the credit is refundable in these years. You can be on disability or other assistance. (Please note that any refund you receive may be counted as an asset for purposes of these assistance programs; check with your worker if your program has any asset limitations.)
People who make significant amounts of money may not be eligible for the full or any credit. There are different income limits each year. In 2011, people who made over $185,210 may only be eligible for a portion of the credit. The income limitation is based on the year you initially earned the credit—if you adopted in 2006 and your income was over the income limit that year, you cannot claim the credit at all. It does not matter if your income was lower in future years.
I adopted a few years ago. Can I still benefit from the credit?
It depends on the year you adopted and your personal tax situation. In all cases you need to be below the income limits for the year (basically, if you make less than about $160,000 to $180,000 a year, you’re fine; above that, you need to look at your income in the year you finalized).
If you adopted in 2010 or 2011 — You will benefit as long as you are below the income limits for those years. You need to amend your taxes for the year you finalized and file a Form 8839 for that year. (If you never filed taxes for that year, you need to file an original Form 1040 for that year.)
If you adopted in 2009 — Again, you should benefit as long as you are below the income limits for 2009. You need to amend your taxes beginning with 2009 and file a Form 8839 for that year. If you were due any credit in 2009 (which is based on your tax liability), you will ask for that portion of the credit with the 2009 amended returns. Anything you carry forward to 2010 you will get with that amendment because tax liability is no longer an issue. You will file a Form 8839 for 2010 with your amended return for 2010 to claim anything that carried forward into 2010.
If you adopted from 2005 to 2008 — It depends on your personal tax situation. You cannot get any refund you were due in these years and that amount of the credit is lost to you. So you need to have enough credit left to carry over to the open years of 2009 or 2010 to benefit. What you lose in the closed years is based on your tax liability for those years.
For example, you adopted one child in 2005 and have tax liability of $6,000 per year. The credit was $10,630, so you would lose $6,000 in 2005 and the remainder of the credit in 2006, so you cannot benefit.
If you adopted a child in 2006 (credit of $10,960) and have tax liability of $2,000 per year, you would lose $2,000 in 2006, $2,000 in 2007, $2,000 in 2008, and would have $4,960 remaining. You would get a refund of $2,000 with your 2009 amended return, and would carry $2,960 into 2010. You get all of that since tax liability is not an issue in 2010.
If you adopted one child is 2005 and had no tax liability from 2005 to 2010, you will get the full credit of $10,630. You lose nothing from 2005 to 2009. You will carry the credit forward every year until 2010 when tax liability is not an issue so you get the full refund with your 2010 taxes.
If you adopted in 2004 — You might benefit. It depends on your tax liability. To benefit from a 2004 adoption you need to have some tax liability in 2009 but not so much from 2004 to 2008 that you would have lost the whole credit. If you have no liability in 2009, you cannot benefit. You cannot carry the credit into 2010 when it is refundable and tax liability doesn’t matter.
If you adopted in 2003 or earlier — It is too late for you to benefit since the credit could only be carried foward to 2008, and 2008 is now a closed tax year.
What documentation is required?
For 2010 and 2011, documentation was required since the credit was refundable. For these years, send with the tax return:
Taxpayers who did not do a special needs adoptions may have to document expenses during the IRS review process so should be prepared to provide canceled checks, credit card statements, or receipts.
For people who already filed for the refundable credit in 2011 or 2010:
I haven’t gotten my refund yet. What’s going on?
For tax years 2010 and 2011, the IRS reviewed the vast majority of applications for the adoption tax credit, requesting documentation and carefully examining it. The amount of time this takes varies greatly from case to case, but most people are waiting several months from the time the IRS receives the requested documentation.
If you haven’t heard anything, you can try calling the IRS to see if your credit is under review or has been assigned to an examiner. Please note that the information you receive by phone is not necessarily accurate so take anything you hear with a grain of salt.
I was told my refund is coming in two weeks. (Or my letter says the IRS has 30 days to review.) Will I get my refund soon?
Don’t assume so. Many people have gotten several 30-day letters before the refund is made. Some people have gotten misinformation by phone. Until the credit paperwork has been reviewed and you hear the case is closed in your favor, you shouldn’t count on receiving the refund quickly. Once the case is closed it typically takes several weeks to get the refund.
Is there anything I can do to speed up the review process?
The best thing to do is respond as quickly as you can to any requests for documentation. If you have a specific financial hardship (foreclosure, unemployment, etc.) or if it is a processing issue (it has taken more than three months) you may be able to get a taxpayer advocate. Not everyone is approved to get an advocate.
We have heard mixed reviews about taxpayer advocates—with some people saying that they were wonderful and sped things up and others saying that their advocates were unresponsive and added another layer to the process. To learn more, visit http://www.irs.gov/advocate/.
Is anyone actually getting these credits?
Absolutely. We hear from more and more people every week who have gotten their refunds. The refunds are definitely happening although it can be a slow process.
The IRS is asking for additional documentation, what did I do wrong? What should I send? Is there something wrong with what I sent before?
Many, many people have had to send documentation a second time (or more). We have heard that the IRS forwards the adoption tax credit for review without forwarding the documentation. The request for documentation is typically to send it to the examiner who is reviewing the credit. All adoptive parents have to send proof of adoption (typically the adoption decree with seal visible). Special needs adopters can send (http://www.irs.gov/individuals/article/0,,id=231663,00.html -- question 13):
An adoption assistance or subsidy agreement issued by the state or county
Certification from the state or county child welfare agency verifying that the child is approved to receive adoption assistance
Certification from the state or county child welfare agency verifying that the child has special needs
For a complete list of documentation that should have been submitted with the return, see page 4 of the instructions for the 2011 Form 8839.
Although it is not requested to be submitted with the return, during review non-special needs adopters are asked to document expenses, typically with canceled checks and credit card statements.
I adopted a child who receives adoption assistance from foster care and am being asked for expenses, what do I do?
All children who receive adoption assistance are considered special needs. You should send proof of the child’s special needs determination (see the list of documentation above) with a letter reminding the examiner that you do not need to have/verify expenses for special needs adoptions. Send along a highlighted version of the FAQs (question 1, paragraph 2) or the instructions for 8839 (i8839_2011.pdf); see instructions for line 5 under special needs adoption) to remind them that special needs adopters do not need to document expenses.
What if I don’t have any of the special needs documentation?
If your child receives adoption assistance benefits, you should request a copy of your adoption assistance agreement from your worker, agency, or the state adoption subsidy manager from the state that pays the subsidy. (See http://www.nacac.org/adoptionsubsidy/stateprofiles.html and click on state name for the manager’s contact information). In California, Colorado, Ohio, and Pennsylvania you may need to contact the county the child was placed from to obtain a copy of the agreement. The state contact should be able to give you contact information for that county.
Some states will issue you a letter that says your child has been determined to have special needs. Some are not able to do this.
If your child does not receive monthly adoption assistance payments, the child may be considered special needs if you receive Medicaid through the adoption asistance program or received reimbursement of nonrecurring adoption expenses. In both of these cases, you should still have an adoption subsidy agreement, although it will list a monthly subsidy of zero.
If you do not receive adoption assistance benefits for your child, it is likely that your child is not considered special needs for purposes of the tax credit. We know of families that have adopted without adoption assistance that the IRS has turned down for the special needs adoption credit (even for children who receive SSI).
What if I claimed the credit as special needs adoption, but it turns out my child isn’t qualified?
If your adoption is not special needs, you will need to document expenses and can claim only as many expenses as you had that were not reimbursed by anyone else (up to the maximum for the year). If your expenses are less than the full credit, you can only receive that much. You may be penalized for requesting more than you were due. We recommend applying to abate any penalty (see below), but cannot say if the penalty will be eliminated or not. The penalty is for 20 percent for substantial underpayment. From http://www.irs.gov/newsroom/article/0,,id=181068,00.html, “The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000 for individuals.”
The IRS is not accepting our adoption subsidy agreement as proof of special needs (because it is not IV-E, it doesn’t say special needs, it doesn’t have a state seal, it doesn’t say why our child is special needs, etc.). What do I do?
There is no requirement for anything other than an adoption assistance agreement. The adoption subsidy agreement usually doesn’t have a state seal and does not need to say anything about why a child has special needs and doesn’t need to say the child is special needs. Children who are not IV-E still qualify.
If you get these denials in writing, you can fax your denial letter to 651-644-9848 or scan and email to firstname.lastname@example.org and we will review it and send to our contacts at the IRS to seek to have it straightened out. If you were told this by phone, explain to the examiner that the IRS own FAQs and instructions for Form 8839 for 2011 say that the adoption subsidy agreement is proof of special needs.
I adopted a child when the child was younger than 18 but I have been turned down because my child is now 18 or older. Is this right?
This is incorrect. Send us the letter that says this (contact above) and we will send it to the IRS to straighten out.
I adopted in 2005 or 2006 and my attempt to amend that year’s return was rejected. Am I out of luck?
Typically the IRS only allows people to amend returns for the last three years—earlier years are considered closed tax years. (Currently anything 2008 and earlier is closed. If you filed before April 15, 2012, 2008 was still open.) However, the IRS has specifically stated that taxpayers can amend their returns to establish the adoption tax credit in a closed tax year. You cannot get any refund you were due in a closed year (that amount is lost to you) but you can do the amendments to carry the remainder of the credit forward.
If you received a denial in writing, you can send it to us for us to follow up with the IRS. It is important to know though that many people receive what seem like denial letters for these early years but they are simply saying that you can’t have a refund that year. The carryover has not been denied.
I am being penalized for improperly claiming the credit. What happens now?
Most people we’ve heard from are being improperly penalized while the IRS is reviewing or wrongly denying the credit. In these cases, the penalty will go away once the cases has been clarified and approved.
The letters from the IRS typically include a Form 886-A, Explanation of Items, which details why the IRS has not approved the credit. The most common explanations we have heard are:
- missing documentation
- the examiner’s rejection of the adoption assistance agreement as proof of special needs
- calculation or carry forward errors.
If you receive such a letter and you claimed the credit correctly, you should write to the IRS explaining why you disagree, and either re-send any documentation requested or clarify that the adoption assistance agreement IS proof of special needs (we recommend highlighting the IRS’s FAQs question 13 or the instructions for Form 8839 for 2011). If this doesn’t work, you can send the denial letter to us to send to our contacts.
Once your refund has been approved, the penalty should disappear.
However, we also have spoken to several parents who made mistakes in claiming the credit, such as:
claiming the credit more than one year; for example, requesting $12,150 for an adoption in 2009 and then seeking an additional $13,170 for that same adoption in 2010
claiming the full credit for an adoption that does not meet the IRS’s definition of special needs (such as an international or private adoption of a medically fragile child without adoption assistance), when expenses were less than the maximum credit
If you are aware that you made an error but haven’t yet received a penalty letter, you might want to write to the IRS to explain and correct your mistake. Assure them that the error was honest and that you are only seeking the amount that you are due.
If you received a penalty letter based on your error, you can apply for abatement of the penalty using Form 843 (http://www.irs.gov/pub/irs-pdf/f843.pdf). Explain why you made the error, and note that you are seeking abatement under the “reasonable cause” option under 5a. Be as detailed as possible about why the error happened (for example, if you used software that caused the problem, name the software, the date you completed the return, and what happened). We do not know if these penalties will be abated, but truly hope so.
If you have an error due to a professional tax preparer or tax preparation calculation error and the IRS will not abate your penalty, you should investigate the preparer’s guarantees. Many have guarantees that say they will cover penalties and interest if they made an error. Please note that some guarantees require you to notify the preparer within a set timeframe, so read the small print and notify the preparer/company as soon as you are notified by the IRS.
See the most common preparers’ guarantees here:
TurboTax — “If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest.” Learn more
H&R Block’s guarantees vary depending on whether you used an in-office preparer or at-home software. For an in-office preparer, they say, “The H&R Block Guarantee is included with every tax return we prepare. If H&R Block makes an error on your return, we'll pay resulting penalties and interest.” Learn more about the other guarantees
Jackson Hewitt — “All paid Jackson Hewitt tax returns come with our Accuracy Guarantee. This entitles you to reimbursement of penalties and interest charged by a taxing authority if a Jackson Hewitt tax preparer makes a mistake completing your return.” Learn more
TaxACT — “If you are assessed a penalty due to a calculation error in TaxACT Free Edition, Deluxe or State, we'll pay the penalty and interest.” Learn more
Liberty Tax — “Our offices will give you the most accurate return and the largest possible refund. If the office makes an error in the preparation of your return that results in penalties and interest, the office will reimburse you for the associated penalty and interest initially assessed.” Learn more
If you used other software or a professional preparer, check out their guarantee policies.