What do you need to know to file for the Adoption Tax Credit in April 2018 for your 2017 taxes? Host Dawn Davenport, Executive Director of Creating a Family, the national infertility & adoption education and support nonprofit, interviews Josh Kroll, Adoption Subsidy Resource Center coordinator at NACAC; and Becky Wilmoth, an Enrolled Agent and Adoption Tax Credit Specialist.
Highlights of the show (click to expand)
- It looked for a time like the Adoption Tax Credit was going to be removed entirely from the new tax bill, but it was left intact.
- The amount for 2017 is $13,570. It is a tax credit. What is a “credit” and how does it differ from a deduction or some other form of tax savings?
- Not refundable- the Adoption Tax Credit was only refundable for 2010 and 2011.
- What type of adoptions are included or excluded? Step parent adoption? Embryo adoption?
- How does the Adoption Tax Credit differ for adoptions from foster care?
- What if the child does not have a disability? How is the adoption from foster care handled?
- What happens if you complete two separate adoptions in one year? In two consecutive years? What about adopting siblings at the same time?
- What is a Qualified Adoption Expense for purposes of the Adoption Tax Credit?
- How far back can you go to claim the Adoption Tax Credit?
- Are birth mother expenses (or expectant mother expenses) allowed as a qualified adoption expense?
- Are failed domestic adoption attempt expenses allowed under the Adoption Tax Credit?
- Are failed international adoption expenses allowed under the Adoption Tax Credit?
- If I took a vacation for bonding to see if child would be a good fit for our family to decide if I wanted to complete adoption. Would vacation be deductible?
- When can you claim the Adoption Tax Credit?
- Domestic infant: Which tax year do we file for the credit?
- International: Does the adoption have to be finalized before we can claim the tax credit? Will we still be able to claim the credit for the total amount we have spent on the adoption, or only the amount that we spent during the year for which we are filing?
- Foster Care: Do the children have to have lived with you for a certain period of time in order to take the Adoption Tax Credit when adopting from foster care?
- Do our children have to be in the US on January 1? Or do we just need to have our adoption decree?
- Special Needs Adoption: How are adoption of special needs children handled under the Adoption Tax Credit. Are special needs international adoptions handled differently?
- What income level is excluded from claiming the Adoption Tax Credit in 2017? How is your income determined?
- What if you can’t use all the credit in one year because you don’t have $13,570 in federal tax liability? How long can the credit be carried over?
- Will the Adoption Tax Credit offset self employment tax, or will it only offset income tax liability? Anybody have a resource that discusses this for those self employed?
- What type of documentation should you submit with your taxes? What type of documentation should you keep in your records?
- How long does a child have to live with you in order to claim as a deduction?
- Kinship adoptions: Can grandparents claim the Adoption Tax Credit for adopting their grandchildren? What if foster care is not involved? What if they have guardianship and do not adopt? What if the child has special needs?
- How does the Adoption Tax Credit differ from domestic private infant adoption vs. adopting from foster care vs. international adoption?
Transcript of the show (click to expand)
[00:00:05] Today we’re going to be talking about the adoption tax credit the federal tax code provides an adoption tax credit for up to thousand five hundred seventy dollars of qualified adoption expenses at the 2017 number for each child adopted whether via a public foster care or domestic private adoption or international adoption. OK that’s the general information. But as we all know the devil is in the details. So today help us figure out the details. We have two real experts on the adoption tax credit one. Josh Kroll. He is the adoption subsidy Resource Center coordinator at the North American Council on Adoptable Children otherwise known as NACAC. We also have Becky Wilmoth. She is an adoption tax credit specialist at Bill’s Tax Service. She is an enrolled agent and adoption tax credit specialist. In general she traveled nationwide to help educate adoptive families agencies caseworkers and attorneys about how this credit can help them. So welcome both Becky and Josh to creating a family to help us understand more about this credit. It looks like for the time it looked like for a while that the adoption tax credit was going to be removed entirely from the new tax bill but thanks to some really great advocacy work by both of you and by the whole save the adoption tax credit committee and community. The tax was the credit inside was left intact. And as I mentioned the amount for 2017 is thirteen thousand five hundred seventy. All right Becky. It is a tax credit.
[00:01:47] I think the first thing we have to understand is what is a credit and how does it differ from a deduction or some other form of tax savings.
[00:01:59] Well what the since it is a credit what a credit does is it helps cover your tax liability after your taxable income has been determined that tax credit. What it does it helps cover that and therefore you get your you know withholding back and then what you do not use of the credit. You can carry that forward for up to five years. What an actual deduction does. For instance when you are able to itemized deductions. What that does that actually lowers your taxable income. So the difference is basically the deduction lowers your income. The credit helps cover the actual tax liability. And you know of course right now the adoption tax credit is not refundable. So what that means is it can cover your tax liability up to the maximum amount for 2017 is 13 570. And then what you do not use. You can carry that forward for up to five years.
[00:03:11] And just to be clear if at the end of five years you have not you don’t have enough tax liability to use up the entire credit. Then it goes away at that point because that is how it works.
[00:03:24] That is correct. You have five years after the initial year. So technically you could call it a six year credit but it’s five years to carry forward.
[00:03:34] Got. Five five carry over a year plus you apply. In total six years to utilize. Yeah I understand you’re correct. All right Josh let’s talk about the types of adoption that are included or excluded from being able to apply for the adoption tax credit.
[00:03:54] Really the only the only type of adoption that excluded is adopting your spouse’s child adopting from foster care. Private domestic or international are all covered by the adoption tax credit.
[00:04:12] What about embryos using donated embryos which is sometimes called embryo adoption. Josh
[00:04:22] They talk about adopting a child not an embryo. So I think universal course before but I’ve not seen the word embryo anywhere in this instructions.
[00:04:33] So my understanding is that it is not applicable right Becky. Have you heard anything different about embryo adoption.
[00:04:42] No it’s not the only way that there were two states a couple of years ago that discussed it and they the only way that they could is do a re adoption after you know the child is born in and most of them most of the parents that do that you know they wish to be particular states right. They don’t want to. So you know I haven’t heard anything other than that.
[00:05:09] OK. Same here. All right. Now I want to talk at the beginning about how the adoption tax credit credit differs for adoptions from foster care. We’ve got a let’s see I got it a general question from Kay. She said I’m confused on the federal adoption tax credit. I adopted this past month. The question was sent in earlier so she adopted last fall. And my daughter qualifies for the maximum subsidy. However I didn’t pay any attorney’s fees and she is not disabled. Do I qualify for the adoption option tax credit. Josh let’s let’s let you answer this question in ingenues case question as a jumping off to explain how the adoption tax credit works with adoptions from foster care.
[00:06:02] OK. So most children who are adopted from foster care not all but most are going to qualify for adoption assistance. Some states calling adoption subsidy. But it’s typically that monthly payment or it could be just the Medicaid through the adoption assistance agreement also could include reimbursement of non-recurring as long as the family is getting one of those things through an adoption assistance agreement. That is proof that the state has determined the child is special needs. Even if the child doesn’t have a disability. Because it also means hard to place. And in that case they will qualify for the full AMAA regardless of what they pay in expenses. So for this family because they do get the adoption assistance even though the child doesn’t have a disability they should indicate that the child has special needs on the adoption tax credit form 39 and claim the full amount of the credit.
[00:07:01] Now you said there were a couple of things that would be used as proof that the child can fall under quote special needs and that having a signed adoption subsidy agreement. The other one I think you said was receiving Medicaid.
[00:07:17] So you’re going to have to have an adoption assistance agreement for all of them. What happens is like my state in Minnesota children who don’t present we don’t have a lot of states kids qualify by age like we’re rescues children who are 1 years or older in Illinois DCF DCF post care are eligible because they’re 1 year old or older. And that’s hard to place. But in Minnesota we don’t have any age. So you have a young child who’s being adopted who is at risk of problems in the future they’ll get to sign an agreement with zero monthly payment but they’ll get Medicaid with the signed agreement and that will be enough for the IRS. So they have to have a signed agreement and get some benefit whether it’s the monthly payment the Medicaid or the reimbursement of non-recurring adoption expenses but all of them will have to have a signed agreement with the state.
[00:08:12] OK. So if even if you have a deferred assistance where I’m not sure that my child is going to need that prenatal exposure or whatever. And so we we have a Adoption Assistance Agreement. It is signed but you’re not getting any money but your child does get Medicaid and that that would again qualify your child as special needs. Under the adoption tax credit. But what about as cases. I didn’t pay anything out. It didn’t cost me bring most adoptions from foster care are don’t cost the adoptive parents anything.
[00:08:48] When the children are considered special needs which is what we just covered is you’re getting adoption assistance agreement with one of those three benefits then they qualify for the full amount regardless of out-of-pocket expenses and that’s spelled out very clearly online one column D as well as in line five of the instructions under cover of special needs adoptions.
[00:09:10] All right. So even if you have you still get to claim the credit even if you haven’t spent any money. If your child qualifies as special needs and in order to qualify for special needs your child has to have an adoption assistance agreement and receive some type of benefit which would include something like Medicaid. Did I read that correctly. Yeah you nailed it perfectly OK. Perfect. All right let’s Becky. Let’s address Kelly’s question. She says what happens if you complete two separate adoptions in one year. Or what if I wait. And they are in two consecutive years. OK so that’s what she’s asking. And I would like for you to expand that also for how does it work when adopting siblings at the same time.
[00:10:00] Becky you qualify. It’s per child. So if you adopted two children in the year 2000 and 17 you would actually qualify for the adoption tax credit for both of them. So you would actually have a twenty seven thousand one hundred and forty dollar credit for that year or if you have one one year and one the next year you would obviously use the first one up first and then you would go to the second one and they would want to keep track of when each one would run out and then he would use the next one. But it is per child. That’s the great thing about it is that if it’s twins they both qualify or if you have two successful adoptions you know in the same year they would both qualify. So and I just want to tag on to something that you and Josh were talking about what you and I consider special needs and what the IRS considers special needs is to complete different things where you generally. The question that the person presented that they don’t have any disability what the IRS considers special needs is hard to place. And each state has a different criteria to what that is. But that subsidy agreement. Again I want to emphasize it just like you guys have that subsidy agreement is the key. You’ve got to have that signed subsidy agreement with no state expenses or not. They’ll they’ll qualify.
[00:11:44] Excellent. Yes. All right.
[00:11:47] This is Josh I want to add one thing to what you just said really good distress. The other thing is we know that there were families who claim children special needs because without a doubt everybody in the world would consider them special needs because they have a disability and it’s very clear. But if they don’t have that agreement for the purposes of the IRS they make that determination. They should only do it based on out-of-pocket expenses not special needs adoption. Which means they get the credit regardless if expenses are left and right. Yeah examine the sibling thing. I don’t think this happens a lot but I definitely have run into it. I know it won’t happen with Becky because I know she knows her stuff as well as anybody. But thankfully there are families out there that adopt more than three sibling groups of three and there are only spots for three children on form Thirty-nine. Back through 2009. It was only two children on that form and in those situations if you adopt if by adopted a sibling group of five I would actually fill up two forms 88 for a night so I could have all five children on their soil correct. Yeah. So that’s very clear in the instructions. But that is something the taxpayers that are not as experienced as Becky have definitely missed in my experience.
[00:13:11] Yeah and it is not unusual to adopt a sibling group larger than than three. So yeah good point. OK excellent. So how far back can you go to claim the adoption tax credit. We have a question from Kim. She said I adopted in 2013 can I go back and claim the expenses on my 2017 taxes.
[00:13:33] Becky with the adoption tax credit you the refundable part you can only go back three years but with the with the adoption tax credit you can actually go back five years but you will not get a refund for those first two years. OK. But you can use the carry forward that you would have if you did not use it all in those first two years and you still have some Decarie to the last three. You can carry it forward but you will not be able to get a refund on those first two years.
[00:14:10] Just to clarify what she said refundable. She meant you can’t get a refund for those earlier years. Not that it will refund right.
[00:14:17] Right. You can’t get a refund for the taxes you paid in the earlier years. Not to correct understand. OK got it. So let’s say as I understood her question she did not. She did not apply that she did not apply for the adoption tax credit. She’s wondering if I hear you right. Yes she can go back. But if she’s already paid the taxes she’ll have to utilize that up in the carry over.
[00:14:43] Right. Go ahead so in 2013 because that is a closed year right now she would have to file for it and use up whatever she could that year but not get her refund because it’s closed. But 14 is still open and 15 and 16 so she could carry forward and use any of it to increase the size of a refund in 14 15 or 16. She could then get a refund for those years OK and she would have to do it by April the 15th of this year ok or what the 2014 amount would be lost. Right.
[00:15:24] All right well listen up Kim. Don’t be late on your taxes. All right. Now we always have a lot of questions about what is considered a qualified adoption expense because that’s the term that used in the statute and in the regs. So one that we question that we often hear is about failed domestic adoption attempt expenses. Are those allowed under the adoption tax credit. Let’s say you’ve tried to adopt domestically a private adoption and it did not then you were not successful but you spent money. What’s happened to those expenses. Let’s say I can remember who I last asked solicit Becky Algol and this winter.
[00:16:13] If you have a failed adoption. One of the things that you need to remember is you have two options. Actually let’s say for instance you paid the expenses in 2016. You could not take them until you do your 2017 return. You have to wait a year before you can take those expenses for an adoption that is not final or that has failed and it will have to go paper your tax return will have to go paper because you do not have a Social Security number to tag to that failed adoption. And then when you have a successful adoption after that the amount of credit that you received from that failed adoption has to be deducted from the successful credit that you receive when you have a successful adoption. The other option is you can combine those expenses of the failed adoption with the successful adoption and then claim that whenever you claim your successful adoption for the adoption tax credit. So
[00:17:24] it’s not a separate. Even in your mind it is a separate thing. But for the purposes of the the tax credit. All attempts go towards one year to the successful adoption when it happens. What about if you are never able to successfully adopt or you decide to give up Becky at that point. Can you can you try to recoup those expenses.
[00:17:49] Well you can. It will just be for the maximum amount. You can’t go any higher than what the maximum amount is of that year.
[00:17:58] Yes. When you need it and you need to claim them the year after you pay those expenses.
[00:18:02] Correct. OK. And you’ll never have a Social Security number for the child obviously because there is no child but you can claim them even if you. But now if you decide then to go back to adopt then you still have to go back and and incorporate and realize that these that the credit was used on the attempt credit and I mean you start over once you’ve had a successful one.
[00:18:25] You basically start over again OK.
[00:18:29] What about failed international adoption expenses. Are those allowed under the adoption tax credit. No. No go in this winter. Josh I’m sorry. Go ahead. The answer’s no. All right. So what about birthmother expenses are the actual term should be expectant mom expected mother expenses. Certain states allow and different states allow different amounts. Are they allowed as a qualified adoption expense Becky.
[00:19:05] No they are not. Not on the federal adoption tax credit. There is some states that you know will give you a credit on your state return but they are not allowed on the federal. Those must be taken off the top of the expenses because they are not qualified expenses on the federal adoption tax credit.
[00:19:24] OK. When this received a question they did not give their name. If I took a vacation for bonding to see if the child would be a good fit for our family decide if we wanted to complete the adoption with their vacation expenses be a qualified adoption expense.
[00:19:41] Josh using the term vacation probably would invalidate it if they were saying this was a required pre placement visit and they had to pay expenses to go and visit and do a placement visit to see if the Manch would work. Then I would say yes but if you call it a vacation I’m going to probably say no.
[00:20:03] That would be my guess as well. Yeah from my experience there.
[00:20:08] But there are definitely situations especially with foster care where you might be matched with the child before they know explicitly if you’re at a distance they want you to do some people placement visits and there can be travel expenses. And those are definitely legitimate for placement visits but if you call it a vacation for bonding then you know or coroner preclusion would before him.
[00:20:36] All right. Becky just kind of summarize then what all is included with a qualified adoption expense. Are agency fees our attorneys fees what is just if you can give us a kind of a crib note version of what they mean by qualified adoption expense.
[00:20:54] According to IRS code qualified adoption expenses are reasonable and necessary expenses directly related or for the principal purpose of the adoption. It can include adoption fees attorney fees court costs travel expenses re adoption expenses in country you know a lot of times they are required for international adoptions. They’re required to have a cell phone in country strictly for the orphanage. Postage your dossier physicals you know there are just so many expenses. But the key words to remember are reasonable and necessary expenses related to the adoption. They it’s very clear what is not qualified expenses birth mother expenses no surrogate parenting agreements. One thing that I want to also say is you know mileage you you cannot take mileage for the adoption tax credit. However keep your gas receipts. I know that sounds crazy when it comes to IRS but there is not a mileage rate for adoption.
[00:22:19] I can check this later but I’ve been told at least when it was refundable we had a family that was doing quite frequent pre placement visits for a foster care adoption and they were able to do mileage and I can track that down and get the information on that. That was straight from an IRS attorney.
[00:22:40] OK. I have I have in the past questioned that with the IRS and Lois told gas receipts instead of mileage. So I have heard the said I’ve heard the same but generally that is you have so many other expenses.
[00:22:58] Yeah I was just thinking you know for most options are going to be well over the amount.
[00:23:03] So you’re correct. And that was something I was going to say is I wouldn’t sweat the little stuff if the big things get you over the maximum Exactly exactly.
[00:23:16] So don’t push the envelope for most adoptions you’re going to be over the amount. There are exceptions to that but non non foster adoptions I should say.
[00:23:28] I think the one other thing I want to say in expenses if you get reimbursed by your employer for the expenses or you know like foster care or adoption. Well this kind of doesn’t make a lot of sense. Never mind. Well the reimbursement of non-recurring those wouldn’t be things but if you’re getting reimbursement on recurring then special needs and you have to document expenses. But those also are things that don’t count as expenses.
[00:23:57] So the main one that comes up we do here where employers what happens summarize again Josh what you were saying. There are definitely employers who give you an adoption credit or not credit. I’m sorry. A benefit can monetary benefit. So how is how is that that has to come off of your expenses before you claim them. Is that correct.
[00:24:19] Correct. What happened. So let’s say I have my adoption costs 20000 and I have 5000 an adoption employer benefits. So what will happen is I will exclude the 5000 so it doesn’t count as income and then I will claim expenses for the credit of 15 vows.
[00:24:42] Got it. OK. All right. So that’s unfortunately we have more that’s happening more with more employers so that’s a great thing. All right. Now let’s move to talking about the when when can you claim the adoption tax credit. And for this I want to break it into the different types of adoption. Let’s start with let’s start with foster care. So for Beckey for foster care adoption. When can you claim let’s say the child has been living with you prior to the adoption.
[00:25:17] So when do you claim that foster care adoption credit you can claim the adoption tax credit for a foster care after it is final. It has to be final. And you know we’re talking about documentation and stuff later. But the foster care has to be final before you can claim the adoption tax credit.
[00:25:39] OK. Perfect. Now that’s easy enough. Now let’s talk about domestic or private domestic infant adoption. Josh we’ve got a couple of questions. Let me read this one one is from Barb she said this is our first child to adopt so I don’t know when to file for the credit. We paid a lot of agency fees in 2017 but the baby will be placed in our home in 2018 with final fees then. So which tax year do we file for the credit. Thank you for your help. Barb’s question is kind of a general launching pad to talk about the winds for domestic infant private adoption out for that family in that scenario.
[00:26:18] It will be 2018. So the private domestic adoption this is sort of bridges are builds off the unsa unsuccessful part private domestic adoptions. If the adoption is not final they can take expenses they can claim expenses as credit the year after they pay them. If it’s not final yet. So if that family had paid their first expenses in 2016 they could take those on their 2017 taxes in the year finalization. You take both that years as well as the prior years so if they finalize in 2018 the expenses paid in 2017 and 2018 take place and I’m going to knock on wood if for some reason that adoption didn’t happen in 2018 they would still be able to take the expenses they paid in 2017 on their 2018 taxes because it would be a domestic private and they’re taking it the year after they paid it so no matter what that family will be able to claim whatever they paid in 2017 2018 taxes even if it did not become final and so forth.
[00:27:28] Domestic infant adoptions. The adoption does not have to be final in order to claim expenses that are incurred the previous year. I said that correctly. OK. Perfect. All right. Now moving on to the winds of international adoption when the credit can be taken. Becky talk to us about if you are adopting internationally when the experience is in fact I’ve got a question. And I’ll read that and you can use that as kind of a jumping ship. She says we are in a lengthy international adoption process and the expenses will span several years before the adoption is finalized. Our first question is does the adoption have to be finalized before we claim the tax credit.
[00:28:13] Yes. OK. It does have to be final on international. B
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