This article, originally published in the Adoptalk 2016 fall issue, was updated for the 2020 tax year. Adoptalk is a benefit of NACAC membership.
by NACAC Staff
Each year, NACAC handles hundreds of inquiries about the adoption tax credit. Through these interactions, we’ve learned that prospective adopters and adoptive parents are often confused about the credit. Some have received inaccurate information from their agencies, adoption professionals, and other parents, or online. Below we outline areas about which there is often confusion. We encourage you to think about how you can carefully frame information you share with prospective adopters.
Understanding Special Needs
For purposes of the adoption credit, “special needs” means that a state has determined a child will be difficult to place without assistance. To be considered special needs, a child must be from the U.S. and must receive adoption assistance or adoption subsidy benefits. All children who receive such benefits are considered special needs, even if they have no disability. And children with disabilities who do not receive these benefits are not considered special needs for purposes of the credit.
Claiming vs. Using the Credit
The most fundamental confusion about the adoption credit relates to how much a family will actually benefit. Many parents call us because they did their taxes and were shocked to learn they’re not going to receive $14,000. Many receive nothing at all. There’s an important distinction between being able to claim the credit and being able to use the credit.
When a family adopts a child determined to have special needs, they can claim the maximum credit as their qualified adoption expenses, even if they had few or no expenses. For special needs adoptions finalized in 2020, families claim $14,300 per child as their expenses. But that does not mean they will receive any or all of that money.
The adoption credit is currently a non-refundable credit, which means it only offsets a person’s federal income tax liability. (The credit was refundable only in 2010 and 2011.) The credit can be used in the year it is first claimed and then can be carried forward for up to five more years to offset any of those years’ tax liability. Whether an adoption is considered special needs does not affect how much someone will be able to use. It only enables them to claim expenses even if they did not have any.
Here’s how we explain it to families:
If you receive adoption assistance or adoption subsidy benefits for your child, you can claim the full credit ($14,300 per child for adoptions finalized in 2020) as your expenses, even if you had little or no expenses. But how much you will receive depends on your income and personal tax situation. The amount of credit you can use is based on your federal income tax liability. Families with adjusted gross incomes of less than $30,000 are not likely to benefit at all. Those making $30,000 to $50,000 will probably be able to use only part of the credit (maybe a few thousand dollars), with the benefit spread out over six years. The credit also starts to phase out for families making more than about $214,000.
Federal tax liability is the amount you are responsible for in federal income taxes. If you have ever done your taxes manually, it’s roughly the amount you would look up in the tax tables in the back of the instructions. If you want to see what your tax liability was in 2019 for a frame of reference, you can look at line 12b of Form 1040. If the line is blank or zero, you had no federal income tax liability. People with no tax liability will not benefit from the adoption credit this year. You can still file for the credit so you can carry it forward to future years if your tax situation changes.
Please note that the amount on line 12b is not exactly what someone would use because there are some credits that come before the adoption credit. (Also note if you were looking for this information from your 2020 1040, you would look at line 18).
We highly recommend making it clear that claiming the credit is very different from being able to use the credit, and that many people will not benefit at all. Because parents often know of others who were able to receive the full benefit in the past, it also can help to tell them that everything was different when the credit was refundable in 2010 and 2011.
Claiming Non-Final Adoptions
Another problem relates to adoptions that have not been completed. For U.S. adoptions with expenses, people can claim the credit before an adoption finalizes—and even if it never finalizes. For these non-finalized adoptions, taxpayers must wait to file for the credit for one year after expenses are paid. (For international adoptions, taxpayers cannot claim any credit until finalization.)
What does this mean? Someone adopting from the U.S. who has expenses in 2018, 2019, and 2020 for an adoption finalized in 2020 claims 2018 expenses with their 2019 taxes and 2019 and 2020 expenses with their 2020 taxes. They are limited to the 2020 maximum of $14,300 per child. Let’s say the person had $5,000 in expenses each year ($15,000 total) and enough tax liability to use the full amount. They would claim and receive $5,000 paid in 2018 with their 2019 taxes. With their 2020 taxes, they would list the $10,000 in expenses for 2019 and 2020 and would receive $9,300—the $14,300 maximum less the $5,000 they received in 2019. Of course, if the parents don’t have sufficient tax liability, they may never use the full benefit.
Claiming for Failed Adoptions
We also hear misinformation from families who have experienced a failed adoption followed by successful adoption. In cases such as these, it’s important to tell people that they are able to claim it only as one adoption, not two. For example, if a couple had $12,000 in qualified adoption expenses in attempt to adopt one child from the U.S. in 2017, they could have claimed those expenses with their 2018 taxes. If they went on to adopt a child in 2020, the IRS considers it part of the same effort to adopt one child, and they are limited to the 2020 maximum of $14,300. That means they can receive only up to $2,300 for their expenses incurred in the second attempt.
The Form 8839 instructions are clear:
In general, the dollar limitation requires you to combine the qualified adoption expenses you paid if you made more than one attempt to adopt one eligible U.S. child. When you combine the amounts you spent, complete only the “Child 1” line…. Complete the “Child 2” or “Child 3” lines only if you adopted or tried to adopt two or three eligible children.
Example 1. You planned to adopt one U.S. child. You paid $10,000 of qualified adoption expenses in an unsuccessful attempt to adopt a child. You later paid $8,000 of additional qualified adoption expenses in a successful adoption of a different child. Complete only the “Child 1” line because you made more than one attempt to adopt one eligible child.
We encourage everyone to raise awareness about the adoption tax credit. It’s an important benefit to promote adoption. But we want to ensure parents know the credit’s limits, particularly if they have low or moderate income.
NACAC continues to lobby for a refundable adoption credit so that more families will benefit and be able to adopt. Learn more about our lobbying efforts at adoptiontaxcredit.org.