With the tax filing season quickly approaching, the Internal Revenue Service recommends taxpayers take time now to determine if they are eligible for important tax credits. Many of our adoptive families will be applying for the Adoption Tax Credit. With that in mind, we have compiled some basic information about the 2020 adoption tax credit
Adoption Tax Credit 101
If you have done any research into adoption financing, you’ve probably heard about the Federal Adoption Tax Credit. But what exactly is this credit, and how does it work?
The Federal Adoption Tax Credit is a non-refundable tax credit that helps families offset the costs of qualifying adoption expenses. Families who paid qualifying adoption expenses in 2020, and owe taxes, may be eligible to benefit from this credit. For adoptions finalized in 2020, there is a federal adoption tax credit of up to $14,300 per child. The 2020 adoption tax credit is NOT refundable, which means taxpayers can only use the credit if they have federal income tax liability.
Parents who are adopting from the U.S. and claiming qualified adoption expenses can claim the credit the year of finalization or the year after they spent the funds. Parents who adopt a child with special needs and are not basing their request on expenses should claim the credit the year of finalization. Parents who adopt internationally cannot claim the credit until the year of finalization.
The credit applies one time for each adopted child and should be claimed when taxpayers file taxes for 2020.
To be eligible for the credit, parents must:
- Have adopted a child other than a stepchild — A child must be either under 18 or be physically or mentally unable to take care of him or herself.
- Be within the income limits — Income affects how much of the credit parents can claim. In 2020, families with a modified adjusted gross income below $214,520 can claim full credit. Those with incomes from $214,520 to $254,520can claim partial credit, and those with incomes above $254,520 cannot claim the credit.
According to the IRS, “qualified adoption expenses” can include items like:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Traveling expenses related to adoption
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child
If you’re not sure whether you are eligible to use the adoption tax credit or if you paid qualifying adoption expenses in 2020, a tax professional will be able to provide more information.
How Much is the 2020 Adoption Tax Credit?
The amount families are eligible to receive from the Federal Adoption Tax Credit depends on a number of factors and will vary based on their unique situation. Families who finalize the adoption of a child with special needs in 2020 and fulfill the eligibility requirements above, can claim the full credit of $14,300 whether or not they had any expenses.
Other adopters can claim a credit based on their qualified adoption expenses, which are the reasonable and necessary expenses paid to complete the adoption that have not been reimbursed by anyone else. If the expenses are less than $14,080, the adopters claim only the amount of those expenses. However, if the expenses exceed $14,300, the adopters can claim up to, but no more than, $14,300, per child.
The Adoption Tax Credit limit is based on modified adjusted gross income (MAGI) and is recalculated each year based on current cost of living. Income affects how much of the credit parents can claim. For the 2020 Adoption Tax Credit, families with a MAGI below $211,160 can claim full credit. Those with incomes from $211,160 to $251,160 can claim partial credit, and those with incomes above $251,160 cannot claim the credit. The tax credit starts to phase out for families with modified adjusted gross income in excess of $214,520, and is completely phased out for families with modified adjusted gross income of $254,520 or more.
Adoption and taxes can be complicated, and you will likely have questions about the tax benefits available in your specific situation. While we hope you find the information in this post helpful, keep in mind that Adoption Choices does not offer tax advice. Talk to a tax professional for more specific information about how the Adoption Tax Credit can benefit your family.
Interaction with the Child Tax Credit
The Child Tax Credit changed in 2018. The amount is now $2,000 per child, but only $1,400 of it can become the refundable additional child tax credit (dependent on the family’s earned income), with the remaining $600 a non-refundable Child Tax Credit. This credit will supersede the adoption tax credit when reducing the tax liability.
To determine the amount of the Child Tax Credit and Additional Child Tax Credit a family uses, a family must complete the Child Tax Credit Worksheet in IRS Publication 972. Software and tax preparers will automatically calculate these amounts.
Taxpayers who can answer “Yes” on the last line of the Child Tax Credit Worksheet may be eligible for the Additional Child Tax Credit, which is a refundable credit (meaning they can claim the credit regardless of their tax liability). To claim the Additional Child Tax Credit, parents must complete IRS Schedule 8812.
How Much Taxpayers Will Benefit
How much, if any, of the adoption tax credit a parent will receive depends on their federal income tax liability in 2020 (and the next five years). In one year, taxpayers can use as much of the credit as the full amount of their federal income tax liability, which is the amount on line 11 of the Form 1040 less certain other credits (see Child Tax Credit above). Even those who normally get a refund may still have tax liability and could get a larger refund with the adoption tax credit. Taxpayers have six years (the year they first claimed the credit plus five additional years) to use the credit.
People who do not have federal income tax liability will not benefit this year. We encourage them to claim the credit and carry it forward to future years since the credit may become refundable again in the future.
Claiming the Adoption Tax Credit
To claim the credit, taxpayers will complete a 2020 version of IRS Form 8839 (available at irs.gov in early 2021) and submit it with their Form 1040 when they file their 2020 taxes. Most tax software will create this form for you. Before filing, taxpayers should review 2020 Form 8839 instructions (will also be available at www.irs.gov) very carefully to be sure that they apply for the credit correctly and to see if anything has changed. The instructions are needed to calculate how much of the credit will be used.
When claiming the adoption tax credit, you’ll want to be ready with documents such as:
- The final adoption decree
- A placement agreement from an authorized agency
- Court documents
- A state’s determination for special-needs children, if applicable
This is a lot of information, and you probably have more questions about the tax credit for adopting a child in your specific situation. Adoption Choices does not offer tax advice and recommends that you talk to your tax professional for specific information on how the Adoption Tax Credit can benefit your family.