Claiming the Federal Adoption Tax Credit for Special Needs Adoptions in 2010
Updated October 2010
Download a PDF of this fact sheet
Families who adopt a child with special needs from foster care can claim a federal adoption tax credit without needing to incur or document expenses. [For non-special needs adoptions (except step-parent adoptions, which do not qualify for the credit), parents can claim the credit with the same rules as below, except that their credit must be based on qualified adoption expenses.]
The per-child tax credit is $13,170 for adoptions finalized in 2010, and the credit is now refundable for the first time.
(If you finalized your adoption before 2010, read Adoption Tax Credit for Special Needs Adoptions Finalized from 2003 to 2009—PDF or HTML.)
Are We Eligible for the Credit?
To qualify for the credit without having qualified adoption expenses, families must:
- have adopted a child with special needs and
- have a modified adjusted gross income of a certain level.
Does my child have special needs?
Children who are harder to place for adoption—older children, children of color, sibling groups, and children with medical conditions or disabilities—are often determined to have special needs. If a child receives adoption subsidy/adoption assistance, the adoption subsidy agreement (or certification that the child is eligible for assistance) is evidence that the state has determined that child has special needs. (See Line 1, Column (d) of the 8839 instructions for the IRS’s language on special needs.)
If your child does not receive adoption assistance (including a $0 subsidy with Medicaid) or you did not receive reimbursement for nonrecurring expenses, NACAC believes the state has not determined that your child has special needs and you will have to document adoption expenses to claim the credit.
Are we financially eligible for the credit?
How much, if any, of the credit you can use is based on your income. Families with a 2010 federal modified adjusted gross income above $222,520 cannot claim the credit at all; families with 2010 incomes above $182,520 can claim partial credit.
How Do I Claim the Adoption Tax Credit?
To claim the credit you need to complete IRS Form 8839 (instructions) in addition to filing your usual IRS Form 1040. Or you can get the form at http://www.irs.gov or by calling 800-829-1040.
As documentation of your adoption of a child with special needs, the IRS will require a copy of your adoption decree and adoption assistance agreement.
See question 13 at http://www.irs.gov/individuals/article/0,,id=231663,00.html for information on acceptable documentation of special needs.
What do I do when the IRS asks for qualifying expenses on line 5?
Because you do not need to document expenses for children with special needs, simply enter $13,170 for 2010 as long as your child receives adoption assistance. [The instructions state: “If you did not claim any adoption credit for the child in a prior year, enter $13,170 on line 5 even if your qualified adoption expenses for the child were less than $13,170 (and even if you did not have any qualified adoption expenses for this child).”]
What Does It Mean that the Credit Is Refundable?
The Patient Protection and Affordable Care Act (the health reform bill passed in March 2010) made the adoption tax credit refundable for tax years 2010 and 2011. When a credit is refundable, you can get more money back from the IRS than you have paid in federal taxes. If you normally get a refund, that means the refund would likely increase by $13,170 per child as long as you do not exceed the income guidelines (and have any other tax liability that would reduce your refund).
If you finalize the adoption of a foster child with special needs in 2010 you should carefully read any instructions that are issued by the IRS to determine how the refundable tax credit will actually work in your situation.
What If I Have Additional Questions?
If you receive adoption assistance for your child and have questions on whether it is taxable income or if you can claim that child as a dependent (and receive the Child Tax Credit), read NACAC’s fact sheet, Tax Issues Related to Adoption Assistance and Adoption, which can be found at: www.nacac.org/adoptionsubsidy/factsheets/taxes.html.
If you have additional questions on the adoption tax credit or adoption assistance, contact the North American Council on Adoptable Children at 651-644-3036 or firstname.lastname@example.org.