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Federal Adoption Tax Credit - Now Refundable!

By Amy K. Wallas, JD
Published in Resolve, for the journey and beyond, Spring 2011

One of the most frequently asked questions about adoption is “How much will it cost?” The answer to this question varies widely depending on the type of adoption, the location of the parties, the needs of the birth parents, and the legal issues involved, among other considerations that are unique to each adoption. However, many families may recoup some, if not all, of their adoption related expenses from Uncle Sam.

How to Receive a Tax Credit for Your Adoption Expenses

The Federal Adoption Tax Credit is a refundable credit for qualified adoption expenses up to $13,170. For tax year 2010, a family or individual qualifies for the full amount of the credit if their modified adjusted gross income (MAGI) is less than $182,520. A partial credit is available on a sliding scale for those with a MAGI between $182,520 and $222,520. The amount of the credit and the income thresholds may rise slightly in 2011 based on inflation.

The credit is “refundable” because it is available as a cash refund, even if the adoptive parent(s) have no tax liability. You could actually receive money from the federal government even if you do not owe federal taxes or the amount you owe is less than your qualified adoption expenses.

The refundable nature of the Federal Adoption Tax Credit is a change from 2009 and years prior when the credit could be carried forward to subsequent tax years, but was not refundable. Another change is that if you have a credit that is being carried forward from 2009 or before, you can claim the balance as a cash refund in 2010 even if you do not have tax liability in the amount of the remaining credit.

Few refundable tax credits exist, so it is significant that adoption expenses are now reimbursed by the federal government. By offering this refundable tax credit, the government provides incentive for people to adopt children. The credit is not available for stepparent adoptions since the child is already in the home of the adopting parent.

The IRS defines “qualified adoption expenses” as reasonable and necessary adoption fees, court costs, attorney fees, and other expenses directly related to, and for the principal purpose of, adopting an eligible child. Thus, adoptive parents may recover costs for initial attorney meetings, agency fees, birth parent living expenses (if allowed under your state’s law) and travel expenses.

When to File for Both Successful and Unsuccessful Adoptions

The Federal Adoption Tax Credit is generally taken in the year that your adoption is finalized, regardless of when expenses were incurred. You may file for additional adoption expenses in subsequent years if the total amount refunded does not exceed the amount of the credit in the last year that you incurred expenses. For example, if you finalized your international adoption and claimed the credit one year and subsequently domesticated your adoption in a later year, then if the amount of the tax credit has increased and you still qualify to take the credit, you may now claim the difference between the current credit and the credit you received for your original finalization.

The government also allows the credit for failed domestic adoptions. You take the credit in the tax year the adoption fails. In order to be considered a failed adoption, the child must be an identified child. Thus, if a birth mother chooses you to be adoptive parents, but then changes her mind, you are eligible for the credit. If you pay an attorney or agency to help find a child to adopt, you cannot take the credit for those expenses until you finalized an adoption or until you attempt to but fail to complete the adoption of an identified child born or to be born in the United States.

Tips for Applying for Adoption Tax Credit

When applying for the credit, you may not file your return online, although you may use an online program to compile it. Along with the completed paper return, you must complete IRS Form 8839 and send documentation to substantiate reported expenses. The documentation may be a final decree of adoption and/or a certificate of adoption you are given as part of your finalization. It generally takes six to eight weeks to receive a refund.

For the adoption of a child who is considered “special needs” as that term is defined by each state, adoptive parents are eligible to receive the full amount of the tax credit ($13,170 in 2010), even if your qualified adoption expenses do not equal the amount of the available credit. In this case, you must attach additional documentation both defining what “special needs” means in your state and showing that there has been a finding that the child you adopted falls under the state’s definition of “special needs”.

While adoption can be an expensive process, the Federal Adoption Tax Credit represents a wonderful resource available to many who seek to build their family through adoption. An experienced adoption attorney may suggest additional state tax incentives that may be available in your state.

Disclaimer: The Federal Adoption Tax Credit was extended through 2011 by the Patient Protection and Affordable Care Act of 2010. As the result of this extension, the credit became refundable. There may be other changes as well. This article is not intended to be construed as tax advice. You should seek the advice of a certified accountant or tax attorney to determine if the Federal Adoption Tax Credit is available to you and how to apply it appropriately.

Source: 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability, IRS Notice 2010-66. Available at: www.irs.gov/pub/irs-drop/n-10-66.pdf

Amy K. Wallas is an associate attorney at Claiborne & Surmay, P.C., a boutique law firm based in Atlanta, Georgia, dedicated exclusively to adoption and assisted reproductive technologies law. She graduated from William & Mary School of Law in Williamsburg, Virginia before moving to Atlanta. Wallas is active in the Georgia Association for Women Lawyers (GAWL) and serves as a volunteer lawyer advocating for children in foster care. She can be reached at amy@gababylaw.com.