Adoption Tax Credit

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  Adoption Tax Credit for 2014 Adoptions
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  Adoption Tax Credit for 2011 Adoptions
 

Adoption Tax Credit for 2010 Adoptions

  Adoption Tax Credit for Adoptions before 2010
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Adoption Tax Credit for Adoptions
before 2010

Updated January 21, 2014

Download this fact sheet as a PDF

 

Many families that adopted foster children who receive adoption assistance between 2005 and 2009 should be able to take advantage of the federal adoption tax credit, even if they had no expenses related to the adoption. The health care reform bill made the tax credit refundable for 2010, and some earlier adoption credits can be carried forward to 2010.

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 they have to have qualified adoption expenses.

Background on the Adoption Tax Credit

For adoptions finalized in 2003 or later, a child whom the state determines has special needs qualified for the full adoption tax credit, regardless of expenses paid, unless the adoptive parents’ income in that year exceeded particular limits. This includes children whose special needs determination is based on being hard to place due to age, race or membership in a sibling group. If a child receives adoption assistance or adoption subsidy, the state has determined the child is special needs.

Until tax year 2010, the credit was not refundable, so many families with lower or moderate incomes (and thus low federal tax liability) could not take advantage of the credit. For 2010, the credit is refundable, which means it will benefit many more families—even those who adopted earlier but didn’t have enough tax liability to access the credit in previous years.

Families who finalized in 2005 or later can benefit from refundability because the tax credit can be carried forward for up to five years. For example, a family who adopted a child with special needs in 2009 earned a $12,150 adoption tax credit. They were able to take only $4,000 of the credit in 2009 because $4,000 was their total tax liability that year. The remaining $8,150 carried forward to 2010.  With their 2010 return, the family gets a refund of the full $8,150 credit, regardless of their tax liability.

To document the adoption and the child’s special needs determination, you should include with your tax return a copy of the adoption decree and the adoption assistance agreement. Write your name and social security number on each page of the documentation you send. See question 13 at http://www.irs.gov/individuals/article/0,,id=231663,00.html for more on the documentation requirements for special needs adoptions.

Below is more information to help families access the credit for adoptions before 2010.

How Can I Access the Credit?

If you already claimed the credit in the year you finalized an adoption:

If you finalized in 2005 or later and carried forward the adoption tax credit on each year’s returns, just carry forward the remaining amount of the credit from your 2009 return to 2010, using the 2010 IRS Form 8839. You'll have to amend each year's taxes. You can claim the full amount remaining as a credit on your 2010 return. (If you claimed the credit the year you finalized, but didn’t carry the credit forward in subsequent years’ tax forms, you’ll need to file amended returns for those years.)

If you didn’t claim the credit but finalized an adoption in 2005 or more recently:

You must file for the adoption tax credit in the year you finalized the adoption. Typically, the IRS allows people to amend returns for a period of three years in order to claim a credit, but you can go back further to establish the adoption tax credit. The IRS has stated (view the letter at www.nacac.org/taxcredit/irsletter.pdf) that those credits can be accessed. The tax years before 2010 are now considered closed tax years so you cannot be paid a refund for a credit that you were due that year. Anything you would have received in these closed tax years is lost to you. (Tax year 2009 closed on April 15, 2013. If you filed an extension for 2009, you have three years from when you filed and get still get any refund due in 2009.)

To benefit from the credit, you have to be able to carry some of the credit forward into tax year 2010. If you had sufficient tax liability in these closed tax years to use up the whole credit, there is no reason for you to amend your taxes. You will have lost the whole credit. (To figure out what you would have gotten each year, you will need to complete a Form 8839 for that year.)

If you adopted in 2005, 2006, 2007, 2008, or 2009, and believe you will have credit to carry forward into 2010, you should amend your returns starting the year you finalized. In the amended returns for years 2005 to 2009, you must complete the return as if you are getting a refund for the credit used. You do not ask for the refund, though. Any credit that you could have been refunded in these years will be lost to you. Then when you amend your 2010 taxes, you can use any credit that would have been due to you that year. Whatever is not lost from 2005 to 2009 can be carried over and refunded in 2010.

For example, a family who adopted one child in 2006 earned $10,960 in adoption tax credit, but didn’t claim the credit with their 2006 return. Their tax liability was $4,000 in 2006. They amend the 2006 return, and claim the credit. Although they cannot receive the $4,000 because 2006 was more than three years ago, they can carry forward to 2007 the remaining $6,960 ($10,960 less the $4,000 they would gotten in 2006). The family then amends for 2007, when they had a tax liability of $2,000. They lose this $2,000 also, but carry forward the remaining $4,960. They had no tax liability in 2008 or 2009, but still need to amend those returns to show that they are carrying forward the $4,960. When they file in 2010, they can take the full $4,960 credit remaining regardless of their tax liability.
 
The chart below will help you look back at your tax forms to see how much you have in tax liability for each year. Although it is actually a bit more complicated, you can look at your total tax liability to see the maximum amount of the credit you would be able to use.

Tax Year
Maximum Credit
Tax Liability
2005
$10,630
1040 - Line 46 • 1040A - Line 28
2006
$10,960
1040 - Line 46 • 1040A - Line 28
2007
$11,390
1040 - Line 46 • 1040A - Line 28
2008
$11,650
1040 - Line 46 • 1040A - Line 28
2009
$12,150
1040 - Line 46 • 1040A - Line 28

If you didn’t claim the credit but finalized an adoption before 2005:

Those who adopted before 2005 cannot benefit since all of the tax years from 2009 and back are closed.  

How Do I Amend Past Returns?

If you paid someone to prepare your taxes, you should ask them to amend your taxes for free since they failed to include the adoption tax credit.
To amend your own taxes, complete Form 1040X, which can be found at http://www.nacac.org/taxcredit/forms.html or by calling 1-800-829-1040.

You will need copies of the returns you filed for each year you amend, plus blank copies of Form 8839 (the Adoption Tax Credit form) for each year you amend. Access previous year’s forms at http://www.nacac.org/taxcredit/forms.html. If you are only amending credits, you will need to complete lines 6 to 22 of Form 1040X.

Child Tax Credit

Since the child tax credit and adoption tax credit interacted from 2002 to 2009, families must complete the Child Tax Credit Worksheet in IRS Publication 972 to see what is the appropriate amount of the child tax credit to take.  This may lead a family to take less or no child tax credit, instead taking that amount as an additional child tax credit (which is another refundable credit). You need to complete Publication 972 for each year you are amending to figure out the child tax credit and how much of the adoption tax credit you can claim in that year (and then how much you might carry forward).

If you already claimed the child tax credit, you will still need to work through Publication 972’s Worksheet to figure out the amount of the adoption tax credit you can use for a given year. Claiming the adoption credit may affect whether you can claim the child tax credit. If your child tax credit is reduced because you claim the adoption tax credit, you should check to see if you can claim the additional child tax credit instead.



What If I Have Additional Questions?

If you receive adoption assistance (subsidy) for your child and have questions on whether it is taxable income or if you can claim that child as a dependent, read NACAC’s fact sheet, Tax Issues Related to Adoption Assistance and Adoptionhttp://www.nacac.org/adoptionsubsidy/factsheets/taxes.html.
 
If you have additional questions on the adoption tax credit or adoption subsidy, contact the North American Council on Adoptable Children at 800-470-6665 or adoption.assistance@nacac.org.
 
Note: This fact sheet is NACAC’s interpretation of the adoption tax credit; it is not intended as legal or tax advice. Each person’s tax situation is unique.
 




 

 


North American Council on Adoptable Children (NACAC)
970 Raymond Avenue, Suite 106
St. Paul, MN 55114
phone: 651-644-3036
fax: 651-644-9848
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