Adoption Tax Credit FAQ

Q&A with the Experts

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Adoption Tax Credit FAQ's

The Federal Adoption Tax Credit provides a huge financial benefit for adoptive parents, but taking full advantage of this tax credit can be confusing. We have an annual Creating a Family radio show on the adoption tax credit in January or February of each year. We accept email questions to ask our expert panel. Sign up for our weekly e-newsletter on the top right of this page to receive notice of when that show will be and when and where to submit questions. You can find additional Adoption Tax Credit information and resources on the Adoption Tax Credit resource page.  Remember, this information is for educational purposes only.  You should consult with your tax preparer about your specific situation.

+ Q: How is the adoption tax credit related to my tax withholdings?
A: Josh Kroll, with the North American Council on Adoptable Children, says: “Often adoptive parents think that if they change their withholdings that they will be able to utilize more of the adoption tax credit. That isn’t really how it works.

If you look at your 1040, the 1st page is all about your income and adjustments to it. Line 38 (top of page 2) is your Adjusted Gross Income (AGI) which is the result of all the work on page 1. Lines 39-42 are where you have deductions and exemptions which lower your AGI down to your taxable income on line 43. Line 46, tax liability, is what you owe in federal income tax before credits, it is the sum of the amount from the tax tables (line 44) and Alternative Minimum Tax (line 45). The adoption tax credit (as well as other credits, lines 47-53)) can lower this amount down to zero (line 55).

After your credits are Other Taxes (56-60, including Self Employment Taxes) they are added to line 55 to come up with your Total Tax (line 61). Your withholding shows up on line 62 which is in the Payment section (62-71). Anything in the Payment section will count as payments against the Total Tax. If your total payments are higher than your total tax you get a refund, if total tax is higher than total payments then you have to pay in with your filing.

So now that you know how your taxes work, you can see that changes in the Withholding only changes the Total Payments made in the year, will not affect your Taxable Income or Tax Liability which is the limiting amount in how much of the adoption tax credit you can use.”

+ Q: I had 2010 adoption expenses and I didn’t know that I could file before the finalization of the adoption (Domestic Adoption – Finalization to occur in 2013). It appears I should have filed with my 2011 tax return. Can I still file with my 2012 tax returns for 2010 expenses? I also have 2011 & 2012 expenses.
A:

  • For expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid, so for 2010 you would claim on 2011 return so you will need to amend the return.
  • For expenses paid in the same year that the adoption is final, you take the adoption tax credit in the same year, and
  • For expenses paid in the year after the adoption is final, you take the adoption credit in the year the expenses were paid.

+ Q: We are in the process of a domestic adoption of a healthy child. We have incurred adoption expenses in 2012, but our adoption likely will not be finalized until 2013. Is it possible to claim any of the 2012 expenses in 2012, while the credit still exists?
A: If the child is a US citizen or resident alien, then you take the adoption credit in the following order:

  • for expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid,
  • for expenses paid in the same year that the adoption is final, you take the adoption credit in the same year, and
  • for expenses paid in the year after the adoption is final, you take the adoption credit in the year the expenses were paid.

For example, you adopted a child in 2009, but you paid adoption expenses in 2008, 2009, and 2010. Your 2008 expenses are taken on your 2009 tax return (they must be delayed by one year because the adoption was not final). Your 2009 expenses are taken on your 2009 tax return (because they occurred in the same year as the adoption became final). You take your 2010 expenses on your 2010 tax return. In this example, your 2009 adoption expenses include costs incurred in both 2008 and 2009.

+ Q: I listened to your radio broadcast on taxes. I'm still confused on my question. We paid expenses to an agency in 2010 and have not had a placement or a failed placement. We are still waiting for a placement. I've been told that we can still take the tax credit for 2011 for expenses paid in 2010. Is this correct? Also I rec'd $2500 from my employer for adoption expenses. It was sent directly to me and made out to me. Do we have to exclude this from the amount we've paid? I appreciate your assistance.
A: For 2010 and 2011, you may be able to claim a refundable tax credit for qualified expenses paid to adopt an eligible child (including a child with special needs). For tax years prior to 2010, the adoption credit is not refundable. Apart from the credit, you may be able to exclude from your gross income amounts paid to you, or for you by your employer, for qualified adoption expenses under a qualified adoption assistance program. You can claim both the exclusion and the credit for expenses of adopting an eligible child. However, you cannot claim both a credit and exclusion for the same expenses.

+ Q: Some websites have used the statement that adoption expenses for adoptions initiated in 2011 and finalized before 12/31/12 will be considered refundable. I do not understand this interpretation since I thought the rule called for these expenses paid in 2011 to be deductible in 2012 (the year after they were paid) since the adoption would not be final until 2012. That being the case, wouldn’t they be subject to the 2012 rules and thus, not refundable. Can you comment on the accuracy of this statement?
A: It is my view that the applicable law is the law of the year in which the expenses were incurred. Expenses incurred during 2011 would, therefore, give rise to a refundable credit. Of course, the timing rules mandate that expenses incurred in a year before the year of finalization cannot be claimed as a credit until the year after the year in which the expenses are incurred. So the expenses in question would be claimed as a refundable credit on the taxpayer’s return for the tax year of 2012. -Mark McDermott (As always, check with your tax professional for the specifics of how this applies to your taxes.)

+ Q: How does the Adoption Tax Credit work with carry forward of the credit from prior years if your income was too high the first year, but is below the cut off limit for this year? Can you take the adoption tax credit?
A: I have been doing research and there was a lot of confusion on the carry forward of the adoption tax credit from prior year if Adjusted Gross Income (AGI) was too high and the taxpayer didn’t get benefit from the previous years. If it is a back year and AGI was too high to take the credit, there is no carry over and therefore you would not get a refund if income is now under the limits.

+ Q: My question is about the tax credit...from 2009 to now we have failed adoption expenses. The 2009 expenses we claimed April 2011. We are actually going to tax court over that. I have noticed on the tax info page that it shows that every year the credit is getting less now. By 2013 it will only be for special needs adoption. So my question is since the failed adoption expenses are almost like 2 years in the past, are the tax laws that affect me the ones in which my expenses were incurred or in which the year I was required to file them? Like my 2010 and 2011 expenses will be filed in 2012 and 2013...so do I go by the laws in those years or the years in which I incurred my expenses?
A: I am first assuming that this is a domestic adoption, in which case you will claim the expenses the same as if the adoption was finalized:

  • for expenses paid before the adoption was failed, you take the adoption credit in the year after your expenses were paid,
  • for expenses paid in the same year that the adoption failed, you take the adoption credit in the same year, so in 2011 (given this was the year your adoption was failed) you would claim the 2009 expenses in 2010 and the 2010 & 2011 expenses on tax year 2011. The IRS will fight you on this but if you keep at it you will win. As for the 2013 tax year, we aren’t sure yet but this is what the IRS is purposing unless they extend current tax law:
    • 2013: $5,000 or $6,000 for a special needs child (projected)
    • 2012: at least $12,170 (will be indexed for inflation), non-refundable
    • 2011: $13,360 (will be indexed for inflation), refundable
    • 2010: $13,170, refundable
    • 2009: $12,150, non-refundable
    • 2008: $11,650, non-refundable
    • 2007: $11,390, non-refundable
    • 2006: $10,960, non-refundable

+ Q: We adopted a special needs child, finalized in 2011. My understanding is that if my employer offers a taxable adoption reimbursement benefit, that I may exclude the entire $13,360 from my taxable income (on line 7 of a 1040) regardless of the amount of the benefit received from my employer (even if it is 0). This is in addition to the full $13,360 tax credit. Is this correct?
A: If you adopt a child with special needs you may be able to exclude up to $13,170 and claim a credit for an additional $13,170 (minus any qualified adoption expenses claimed for the same child in a prior year) even if you or your employer did not pay any qualified adoption expenses. As to the specifics of the job change I don’t see why not but I would contact the tax payers advocate to get further clarification. I didn’t see anything written in law regarding this. I would claim it and fight it. 

+ Q: We completed the adoption of a child from Florida in 2010, claimed the adoption tax credit for 2010, and just received IRS correspondence that while they're paying most of the credit, they're not paying the full amount because funds directly paid to the birth mother, such as living expenses, do not qualify for consideration. As is the norm in Florida, we paid reasonable living expenses incurred by the birth mom for the duration of her pregnancy up until delivery, which included rent, gas, food, some maternity clothes. The birth mom is low-income without steady work and is receiving state and federal assistance in part. I would like clarification on the matter of whether reasonable living expenses for the birth mother covered by us, the adoptive parents, should qualify as an adoption expense that is reimbursable by the adoption tax credit. And if so where we can find the statutory authority or code to back us up?
A: Below is the IRS guidelines on qualified expenses. If reasonable birth mother expenses paid by the adoptive parents was necessary for the adoption to occur then you should ask for a reconsideration.
Qualifying Expenses
Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.
Nonqualifying expenses

  • Qualifying adoption expenses do not include expenses:
  • That violate state or federal law,
  • For carrying out any surrogate parenting arrangement,
  • For the adoption of your spouse’s child,
  • Paid using funds received from any federal, state, or local program,
  • Allowed as a credit or deduction under any other federal income tax rule, or
  • Paid or reimbursed by your employer or otherwise (except that amounts paid or reimbursed under an adoption assistance program may be qualifying expenses for the exclusion).

+ Q: When can we claim the adoption tax credit?
A: What year you can claim the adoption credit depends on when the adoption was finalized and whether the adopted child is a US citizen, resident alien, or foreign national.
If the child is a US citizen or resident alien, then you take the adoption credit in the following order:

  • for expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid,
  • for expenses paid in the same year that the adoption is final, you take the adoption credit in the same year, and
  • for expenses paid in the year after the adoption is final, you take the adoption credit in the year the expenses were paid.

+ Q: You mentioned that you will have to file a paper return for 2010 and 11 if you claim the credit that year. For foreign adoption you gave some things that had to be attached because the adoption has to be final. What has to be attached to a return for a Domestic adoption that has not been finalized, but part of the adoption credit is being claimed from prior year out of pocket expenses?
A: Yes, for 2010 & 2011 if you are claiming the credit it will be a paper return. For the domestic adoption credit that isn’t finalized this is the order on how you take the credits:

  • for expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid,
  • for expenses paid in the same year that the adoption is final, you take the adoption credit in the same year, and
  • for expenses paid in the year after the adoption is final, you take the adoption credit in the year the expenses were paid.

For example, you adopted a child in 2009, but you paid adoption expenses in 2008, 2009, and 2010. Your 2008 expenses are taken on your 2009 tax return (they must be delayed by one year because the adoption was not final). Your 2009 expenses are taken on your 2009 tax return (because they occurred in the same year as the adoption became final). You take your 2010 expenses on your 2010 tax return. In this example, your 2009 adoption expenses include costs incurred in both 2008 and 2009.

Substantiating Documents Now Required

The Internal Revenue Service also announced further guidance regarding the adoption credit. Starting with 2010 tax returns, people will need to submit documentation with their tax return to prove they are entitled to the adoption credit. Individuals will need to attach copies of various documents to their tax return and mail their tax return to the IRS for manual processing. That means, taxpayers who are claiming the adoption credit will not be eligible to electronically file their return. Acceptable documents to substantiate that an adoption has become final include:

  • An adoption order or decree,
  • A Hague Adoption Certificate,
  • An IH-3 visa, or
  • Foreign adoption decree translated into English

If an adoption is not yet final, taxpayers will need to include documents such as:

  • An Adoption Taxpayer Identification Number for the child,
  • Completed home study by a placement agency,
  • Hospital document authorizing the release of a newborn to the adoptive parents,
  • A court order, or
  • An affidavit (original) or statement (notarized) from an adoption attorney or government official

+ Q: I had large income for 2008 and couldn’t take the adoption credit what can I do.
A: If you didn’t claim you should amend your 2008 return to carry the credit forward. For tax year 2010 & 2011 the AGI limitations do not apply for carry over credits. You will be able to get this credit.

+ Q: I have been fostering to adopt two children (a sibling set) since October 2009. The adoptions are not final, yet I have adoption expenses from 2009 that were not claimed on my 2009 tax returns, and additional adoption expenses in 2010. It is likely although not guaranteed that the adoptions will finalize in 2011. Can I claim adoption expenses now from 2009? It is my understanding I cannot claim the adoption expenses in 2010 until 2011 assuming finalization occurs then, is this correct? What if finalization doesn’t occur until 2012? Do I lose the expenses from 2010? From 2009? Given this scenario, with the added situation that one of the children is a US citizen and the other is not and at this point does not have a US ID#. What are the options and avenues for claiming both children as dependents (I am single)? It’s confusing to me as to whether I file the return with an ITIN application attached, or apply for the ITIN first? One tax professional said I could apply without the ITIN and not claim the child and then amend the return when I get the ITIN – but if the ITIN application is submitted with the tax return, this doesn’t make sense to me. I have already heard that perhaps I should file as head of household and then no tax ID # is needed – is this correct? Which is in my better financial interest?
A: For a domestic adoption you can claim the credit the year before the adoption is final so for the payments made in 2009 you can claim them in 2010. In 2012 it depends on what the tax law says in regards if you can claim additional expenses.
When to claim adoption credit
DOMESTIC ADOPTION FOREIGN ADOPTION
Expenses paid in a year… claim credit in….. Before adoption is final following year year adoption is final Adoption is final year paid year paid After adoption is final year paid year paid
If you have a dependent (and you do) you will change your filing status from single to Head of Household. This is always a better status. You can apply without the ITIN, file one than amend your return with the second child. You will need an ITIN or SS# to file and get credit.

+ Q: We have read conflicting reports online even on accountant's websites as to whether the adoption tax credit will be refundable in 2012. Could you share with us your understanding of this?
A: As the law is written right now (it could change with the right lobbyist)

  • 2013: $5,000 or $6,000 for a special needs child (projected)
  • 2012: at least $12,170 (will be indexed for inflation), non-refundable
  • 2011: $13,360 (will be indexed for inflation), refundable
  • 2010: $13,170, refundable

+ Q: A few more questions about claiming the tax credit with a failed adoption. Most of the documents, with the exception of the homestudy, are not available because the adoption did not go through. Can I still claim all qualified expenses even though no child resulted? Also, would I wait a year to claim these expenses?
A: You can claim the expenses you incurred but you must be able to show proof to the IRS. Documents between the agency would help prove this or any legal paperwork. If you adopt domestically and the adoption fails, then you can take the adoption tax credit the year after your adoption has failed. So if this year (2010), you are in the process of adopting domestically, and spend $7,000 on adoption related fees and birth mother living expenses and the birthmother changes her mind, you can take the tax credit of $7,000 when you file your 2011 taxes in 2012

+ Q: Can you claim for the qualified expenses even if you do not finalize a successful adoption in 2010 or 2011. How about if you decide to give up and not adopt?
A: Expenses of Failed Adoptions Adoption expenses relating to a child who is a citizen or resident of the U.S. are eligible for the credit, even if the adoption is not finalized. However, adoption expenses relating to a noncitizen, nonresident child do not qualify for the credit if the adoption fails As far as the adopted parents giving up the baby, the law doesn’t clearly define this as a failed adoption. I don’t think this would qualify, the purpose of the credit is to help place children in homes and this doesn’t line up with that purpose.

+ Q: My husband and I are wondering about a failed adoption in 2010. Can we claim all expenses paid towards it from 09 & 10? We can't get a straight answer from tax preparers on which expenses, from what year can be claimed on 2010. We can certainly prove the failure is final! 🙂
A: Section 36C allows a refundable tax credit for qualified adoption expenses (QAE). QAE are the 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. For example, a taxpayer may claim traveling expenses (including amounts expended for meals and lodging while away from home) paid or incurred to adopt an eligible child. A taxpayer may claim QAE paid or incurred for an unsuccessful domestic adoption. It’s all in Notice 2010-66. If you are claiming an adoption credit for qualified expenses related to a failed (or not yet finalized) domestic adoption, you must attach one of the following to your tax return (and file it manually – no efile allowed):
(1) An adoption taxpayer identification number, obtained by the taxpayer for the child, included on the taxpayer’s income tax return (instead of attaching a document),
(2) A home study completed by an authorized placement agency,
(3) A placement agreement with an authorized placement agency,
(4) A document signed by a hospital official authorizing the release of a newborn child from the hospital to the taxpayer for legal adoption,
(5) A court document ordering or approving the placement of a child with the taxpayer for legal adoption, or
(6) An original affidavit or notarized statement signed under penalties of perjury from an adoption attorney, government official, or other person, stating that the signor:
A. Placed or is placing a child with the taxpayer for legal adoption, or
B. Is facilitating the adoption process for the taxpayer in an official capacity, summarizing the facilitation.

+ Q: We had our taxes prepared by H&R Block. We received our refund check and the amount did not include our adoption credit. We were not told that we had to send any documentation with our return. We adopted a baby girl from Vietnam in March 2009. We completed our readoption in our state this year. We have heard nothing from the IRS. Is it too late to send the required documentation to the IRS? Do we need to amend our return.
A: Did you mail your return in to the IRS with the required documentation? The return wasn’t eligible to be e-filed this year if you qualify for the credit. Most of my clients got a follow up letter from the IRS stating the additional documentation that they were looking for. Is there a form 8839 included in your return? I would ask your tax preparer to follow up to find out what the delay is.

+ Q: Do I only need receipts for the credit amount of say $12,000 even though I spent around $25,000 in total.
A: I would keep all receipts relating to the adoption but yes the credit is $13,360 for tax year 2011 so you only need to prove that much to the IRS, anything else is over and beyond.

+ Q: If the refundable credit is in place till December 2011 and if an adoption is completed IN 2011, can you claim it in February for your 2011 taxes if it expires?
A: February of what year? Is it a domestic adoption? When did the adoption finalize? If it is a domestic adoption that finalizes in February 2012 then you take the adoption credit in the year after your expenses were paid. If you began paying expenses in 2010 then you can take them on your 2011 return.

+ Q: I started adoption in 2007 international. It did not get finalized until 2009. In 2010 the child enter the United States. Again some expenses were incurred. I planned to re-file my 2009 tax return what expenses will I include in my tax forms? Is it 2007, 2008, 2009. Also for 2010 tax returns will I include 2007 thru 2010 expenses on the adoption.
A: Qualified Adoption Expenses are calculated by:

  • Adding up all the expenses related to the adoption,
  • Subtracting any amounts reimbursed or paid for by your employer, government agency, or other organization.

Adoption expenses include any and all costs directly relating to your adoption and that are reasonable and necessary for your adoption. Expenses include adoption fees, legal fees, court costs, and travel expenses. Taxpayers who adopt a special needs child can claim the full amount of the adoption credit without regard to the actual expenses paid in the year the adoption becomes final.
Eligible expenses must be “directly related” to the adoption of an eligible child. This may include adoption fees, legal fees, and court costs. Expenses for a failed adoption might qualify for the credit if followed by a successful adoption, but the two adoption efforts would be considered as one adoption and subject to the dollar limit per eligible child. The editors of JK Lasser’s Your Income Tax advise:
“Do not include expenses paid or reimbursed by your employer or any other person or organization. You may not claim a credit for the costs of a surrogate parenting arrangement or for adopting your spouse’s child.” (page 469) When to Claim the Adoption Credit What year you can claim the adoption credit depends on when the adoption was finalized and whether the adopted child is a US citizen, resident alien, or foreign national. If the child is a US citizen or resident alien, then you take the adoption credit in the following order:

  • for expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid,
  • for expenses paid in the same year that the adoption is final, you take the adoption credit in the same year, and
  • for expenses paid in the year after the adoption is final, you take the adoption credit in the year the expenses were paid.

For example, you adopted a child in 2009, but you paid adoption expenses in 2008, 2009, and 2010. Your 2008 expenses are taken on your 2009 tax return (they must be delayed by one year because the adoption was not final). Your 2009 expenses are taken on your 2009 tax return (because they occurred in the same year as the adoption became final). You take your 2010 expenses on your 2010 tax return. In this example, your 2009 adoption expenses include costs incurred in both 2008 and 2009.

+ Q: We had adoption expenses for a domestic adoption in 2009 and 2010. The adoption failed in 2010. We can't seem to get a straight answer about when we can get our $ from the failure. Can we only claim 2009 or can we do both years? We don't have finalization papers but can prove the failure.
A: The publication isn’t written clearly but from what I understand, yes you can take expenses from 09 & 10 for the failed adoption. See below:
How to Take Adoption Tax Credit for Failed Adoption
IRS form 8839 IRS tax form 8839 allows individuals to take a federal income tax credit for adoption even if your dreams of adopting a baby or child last year were crushed when the adoption failed? On top of not having your precious child you spent thousands of dollars. Is there anyway you can still take the adoption tax credit for the failed adoption? According to the IRS form 8839, publication and instructions, “Information About Your Eligible Child or Children” Page 2, part one, “Yes,” you can. In fact, the IRS has provided instructions to take the deduction even when you do not have all of the eligible child’s required information such as a Social Security Number. How do you take the federal adoption tax credit for a failed adoption?
Adoption Day
Treat failed adoption expenses the same way for federal income tax credit purposes that you would treat adoption expenses for an adoption that was not finalized prior to the end of current tax year. In prior years, to claim adoption expenses you would need a child’s social security number (SSN), an adoption taxpayer identification (ATIN), or an individual taxpayer identification number (ITIN).
2
Look at line 1 of form 8839 Complete as much information about the child as you can on line 1 of form 8839, according to IRS form 8839, information publication.
3
Write the words “See Attached Statement,” in the columns that you do not have complete information for, such as the SSN column. Then on a separate piece of paper, write or type your name, social security number, the name and address of the agency or attorney that assisted in the failed adoption. Indicate on the form that you had a failed adoption and do not have the child’s SSN, birth date, or whatever your missing information is. Then attach the statement to your tax return.

+ Q: I finalized my adoption in 2005, but was unaware of the tax credit. I haven't filed taxes because I am disabled and am not required due to not enough money. I want to file this year and was wondering if I could claim the adoption tax credit, possibly as a carry forward? I have my attorney receipts etc. Also since I didn't file in 2005 do I need to amend 2005? Do you have any advice about that?
A: From 1997 through 2009, the adoption credit had a 5-year carry forward provision. Because the carryforwards are used on a first-in, first-out basis, if you are claiming a carryforward you must have a Form 8839 on file for all prior years for which the carryforward was allowable. Amending prior year returns. If you did not previously file Form 8839 for the same adoption (or adoption attempt) but are claiming a credit carryforward in 2010, you must amend your prior year income tax returns and file Form 8839 for the applicable years before you claim a credit carryforward in 2010.

+ Q: We've adopted sibling groups multiple times from Ukraine, which is a cash economy. The bulk of our expenses were paid in cash. I was able to get a summary receipt from our facilitator there, for the cash payments. We don't have receipts for food/lodging, since food was bought at markets, but I think the Cohan Rule could be applied there, especially since our per diem averaged out to one fourth the U.S. State Department rates. I can also show from our bank statements that this cash matches out with what we withdrew before our departure flights less what we deposited back in after our return flights. We did an independent adoption from Ukraine, where you do not use an agency but instead work directly through their court system. For these, it is not uncommon to arrive at the airport with $20,000 in hundred dollar bills. We of course paid with credit card or check or money order where we could, mostly flights and homestudy fees, and have copies of those receipts and their payments. Nevertheless, these transactions only get us to less than half of the credit. It's the cash that gets us all the way, plus about 30% over. Any thoughts on how the IRS is working through cases like this? Part of me pities them for getting such a mess dumped on them. We provide a write-up and spreadsheets to ease the analysis, instead of only the receipts and bank statements. But would you also recommend just requesting a taxpayer advocate immediately, someone who had more time to work through the documentation and ask us questions? Or is it better to just let it all go to the examiner?
A: This is a great question, I would claim the entire credit and make good documentation. If the IRS asks for your expenses then if documented properly you should be able to make a good case. The taxpayers advocate can also help you out if it does get audited and disallowed. If you are honest and document things the IRS does have discretion to be lenient, but this is a case by case and depends on who you get.

+ Q: This year we got to claim our adoption tax credit. We filled out all of the necessary paper work but forgot to include a copy of the final adoption decree. They paid us for the remainder of the our return but not the adoption tax credit. Is it too late for us or can we file an amended return?
A: If the form was attached to the 1040 as a paper return you should be receiving a letter from the IRS explaining why the difference of your refund and you will have a chance to attach the final adoption decree to the IRS letter to get that refund.

+ Q: Thanks very much for your site and your shows. I listened to the podcast on the tax credit and walked away thinking I would be getting additional credit for my 2010 tax filing, but that doesn’t appear to be the case. So, I wanted to provide you with my question and understanding to see if you can assist. Our adoption all occurred in 2009, we had some expenses in 2008, but we adopted and finalized all in 2009. (US Adoption, non-special needs). According to the 2009 form, we had $19,900 in qualified adoption expenses, but since the credit was $12,150 max per child, we only received $12,150 for our 2009 filing. In listening to the podcast, it seemed to imply that I would be able to claim the remaining balance unused credit of my expenses from 2009 in 2010, up to the max allowed for 2010. Since that difference is less than the max allowed that is what I was expecting. However, in filling out the tax, yes I’m using Turbo Tax and did update after the 17th, it says I am not eligible for any additional credit. I have read and re-read the information being asked, so wanted to ask the question to see if my understanding is correct.
A: This is correct they already received the max benefit in 09 and there wouldn’t be in carryovers into tax year 2010.
2009 Adoption Tax Credit
In October, the adoption tax credit was reviewed and the following changes were made: “.03 Adoption Credit. For taxable years beginning in 2009, under § 23(a)(3) the credit allowed for an adoption of a child with special needs is $12,150. For taxable years beginning in 2009, under § 23(b)(1) the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $12,150. The available adoption credit begins to phase out under § 23(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $182,180 and is completely phased out for taxpayers with modified adjusted gross income of $222,180 or more. (See section 3.14 of this revenue procedure for the adjusted items relating to adoption assistance programs.)”  The tax credit amount for 2008 was $11,650, so that equals a $400.00 raise in credit! Great news for all adoptions finalizing in 2009.

+ Q: I heard your presentation on the Creating a Family radio show with Dawn Davenport. It was great to hear about the adoption tax credit. I have multiple questions that are specific to our situation. We adopted a beautiful little boy, Noah from Russia and the adoption was finalized in Dec 2009 and we got the adoption tax credit in 2009. We had a total of $88,000.00+ qualified adoption expenses. We got back the tax credit last year, but this year I am making a lot more money and most likely will not get the credit this year, but we will get some of the credit from the money moving forward. Now, I work, but my wife works harder as a stay at home mommy with four children. So, how do we lower our MAGI? Can we get an IRA for her if she does not work? I already have a 401k and I can max. mine out, but it will not get us down to $182, but if we maxed her out then it would. We are planning on adopting a special needs child from China do you have any way to lower our MAGI? Also, I received a Pediatrix Development Award (25,000 per year for three years while in Neonatal-Perinatal Medicine Fellowship). Now, Pediatrix divides the $25,000 by 12 months put it in my check now—for the next three years, I get taxed on it and the it gets pulled out as a deduction. So, is that truly income? Does that count towards my MAGI? Does Florida have any state adoption credit? I could not find any. Also, do you have the schedule for the MAGI? Starting at $182K up to $222K? How much you get based on the MAGI? Thank you for your time.
A: If you have any carry over credit for 2009 the AGI limits for 2010 do not apply. This means if you have $2,000 carrying over from your adoption in 2009 than you will get this money back. Yes your wife can (in most cases) do a spousal IRA deduction up to $5,000.00 (under age 50) or $6,000.00 over age 50. Other ways to reduce AGI would be to ask if you can defer any income to the following year. Do you have a business or is all your income W-2? There are investments (natural gas partnership programs and others) that the money you invest can decrease your AGI and these types of investments could be a great opportunity for you. There are risks to investing in all investment so if you would like further info please let me know. Do you receive the money for the award now?

+ Q cont.: I think all my income is from a W-2. I will look into the spousal IRA. Do you have any websites about the investments with natural gas? I received the pediatrix development award in 2006, 2007 and 2008. It basically was a loan and they forgive each year with a year of working for Pediatrix. The only problem I am finding now is that they divide the $25,000 over the year---$2083 and add it into my check as income, so I get taxed on it and then take it out $2038 as a deduction. I guess that is legal. I do not have to pay the $25,000 back since I am working for Pediatrix, but I do have to pay taxes on it. It also puts me over the limit for the adoption credit, which is a good thing that I am making more money than I did last year. Thank you very much for getting back to me so quickly.
A cont.: It appears your preparer is incorrect, here is the exact verbiage from the IRS website regarding carryover credits and the AGI limitations. 1. Amounts Carried Over from Earlier Taxable Years to a Taxable Year Beginning in 2010 An amount of an adoption credit claimed in an earlier taxable year that a taxpayer carries forward to a taxable year beginning in 2010 is allowable as a refundable tax credit. An amount that a taxpayer carries forward to a taxable year beginning in 2010 is not subject to an income limitation in that taxable year. The following examples illustrate these rules.
Example 1. (i) In 2008, Taxpayer pays $2,000 of QAE to adopt an eligible child who is a citizen of the United States. In 2009, Taxpayer pays an additional $8,000 of QAE and the adoption becomes final. The adoption credit for $10,000 of QAE is allowable in 2009.
(ii) Taxpayer’s tax liability for taxable year 2009 is $6,000, and Taxpayer applies $6,000 of the $10,000 credit against Taxpayer’s 2009 tax liability. Taxpayer carries forward $4,000 of the credit to 2010.
(iii) In 2010, Taxpayer’s tax liability is $3,000. Taxpayer applies $3,000 of the $4,000 carried forward adoption credit against Taxpayer’s 2010 tax liability. Taxpayer is entitled to a refund of the remaining credit.
Example 2. (i) The facts are the same as in Example 1, except that in 2010, Taxpayer pays an additional $2,000 of QAE. Taxpayer’s income exceeds the upper income limitation for 2010.
(ii) Because of the income limitation, the adoption credit is not allowable for the $2,000 of QAE Taxpayer pays in 2010. However, Taxpayer may apply the $4,000 adoption credit carried forward to reduce Taxpayer’s tax liability for 2010 and may receive a refund of any carried forward credit that exceeds Taxpayer’s tax liability.

+ Q: A question we keep getting is how far back can you go to amend you tax returns to have a carryover that you may not be able to claim, but weren’t able to claim due to AGI limitations in the past that don’t apply for 2010.
A: Carryforward From Prior Years (2005–2009) From 1997 through 2009, the adoption credit had a 5-year carryforward provision. Because the carryforwards are used on a first-in, first-out basis, if you are claiming a carryforward you must have a Form 8839 on file for all prior years for which the carryforward was allowable. Amending prior year returns. If you did not previously file Form 8839 for the same adoption (or adoption attempt) but are claiming a credit carryforward in 2010, you must amend your prior year income tax returns and file Form 8839 for the applicable years before you claim a credit carryforward in 2010.

+ Q: Is it too late to lower Adjusted Gross Income for 2010 for adoption tax credit purposes?
A: The only thing you could do now is contribute to an IRA if they are eligible. The have till 04/15/2011 to fund it for the 2010 tax year. A married person over age 50 may be able to put in up the $12,000.00 for the two of them lowering their AGI but that amount.

+ Q: I had a large income for 2008 and couldn’t take the adoption tax credit for that year. Is there anything I can do now to get the credit.
A: Yes. If you didn’t claim the adoption tax credit on your 2008 federal taxes because your adjusted gross income (AGI) was above the limit, you may still be eligible for the adoption credit refund this year. You should amend your 2008 return this year to carry the adoption tax credit forward. For tax years 2010 & 2011, the AGI limitations do not apply for carry-over adoption credits. You will be able to get this credit as a refund.

+ Q: I'm confused as to when (what year) I should claim my adoption expenses on my federal tax forms in order to get the adoption tax credit. I would like to claim all that I can this year since it is a refundable credit for 2010.
A: When to claim adoption tax credit: DOMESTIC ADOPTION FOREIGN ADOPTION
Expenses paid in a year… claim credit in…..
Before adoption is final following year year adoption is final
Adoption is final year paid year paid
After adoption is final year paid year paid

+ Q: I have been fostering to adopt two children (a sibling set) since October 2009. The adoptions are not final, yet I have adoption expenses from 2009 that were not claimed on my 2009 tax returns, and additional adoption expenses in 2010. It is likely although not guaranteed that the adoptions will finalize in 2011. Can I claim adoption expenses from 2009 on my 2010 federal taxes in order to get the adoption tax credit? It is my understanding I cannot claim the adoption expenses on my taxes in 2010 until 2011 assuming finalization occurs then, is this correct? What if finalization of the adoption from foster care doesn’t occur until 2012? Do I lose the expenses from 2010? From 2009?
A: For a domestic adoption you can claim the adoption tax credit before the adoption is final, so qualified adoption expenses made in 2009 can be claimed on your federal taxes in 2010. We don’t yet know what the tax law will say in 2012 about if you can claim additional expenses. [The adoption experts here at Creating a Family add the following: Many children adopted from foster care qualify as a special needs adoption. Make sure you are aware of the special federal and state tax benefits available for special needs adoptions. See our Adoption Tax Credit page for resources to help you.]

+ Q: I am running my numbers in H&R Block’s software. Although the form is not available yet, I wanted to see how this would affect us considering we’ve used very little of our adoption tax credit, and have a $20,500 carryforward. Well, with H&R Block, it asks you to put in your carryforward amounts from 2005-2009. When I do this, it coughs up a return amount of $61,000, as if it is refunding you for every year you claimed a carry-forward. Surely this information is incorrect, right? Also, once our credit is refunded this year, can we claim the credit again next year, in what will be our 5th year, or once this is cashed out, is it over and done for anyone who had a carryforward?
A: First, I would highly recommend that she doesn’t prepare her own tax return. The problem with doing your own tax return lies in the ever-changing nature of the Internal Revenue Code, which is measured at more than 3 million words. In 2010 alone, several new laws were passed that contained numerous tax changes, affecting common issues such as Section 179 business equipment depreciation, retirement plans and capital gains, AMT amounts not including the extra deductions through the stimulus plan you may not even be aware of. Many of these laws passed after forms had been printed and some tax software packages were already on store shelves. It is true that most tax software packages can be updated online to reflect changes, but only if you know what to look for and use the update feature before completing your tax return. Otherwise, you run the risk of missing tax breaks or unintentionally violating the rules. A red flag is an error or omission that attracts the attention of IRS auditors. It may be a simple error, but once auditors realize there is something wrong with a return, they may begin to wonder what else might be wrong and dig deeper. That’s a scenario taxpayers want to avoid. OK, now to her question. I would really need to see her information to see what she is doing wrong, but if she paid $20,500 for a final adoption in 2009 and didn’t receive any credit, then the $20,500.00 would be a carryover credit on the e2010 return and she would get the $13,170.00 back.  She wouldn’t get anything more for the same child in future years. 

+ Q: There has been a lot of confusion/conversation/contradictions on adoption boards about the 2010 adoption tax credit and purchased tax software. I have heard that you cannot use Turbo Tax, that you can but cannot efile, that form 8839 is not available, that it will be after 2/10, and that it will be available after 2/17.
A: Our adoption tax credit expert, Nicole Albrecht obviously doesn’t use Turbo Tax, so we contacted Turbo Tax for the definitive answer. Here’s what they said. “Currently, Turbo Tax is not calculating some adoption credits correctly, but a release will be issued on Feb. 10, 2011 that will fix the calculation errors. The forms for the adoption credit are scheduled to be finalized by the IRS on February 17th and at that time Turbo Tax will allow you to print and file the forms by mail. You will be able to use the Turbo Tax Deluxe you have already purchased, but be sure to update the program. No one claiming the adoption credit will be able to e-file their return in 2010 due to changes in IRS regulations.

+ Q: We are planning on adopting a special needs child from China, but in order to qualify for the adoption tax credit we need to lower our adjusted gross income. Do you have any suggestions?
A: First, in order to reduce your Adjusted Gross Income (AGI) in order to qualify for the federal adoption tax credit, max out you and your wife’s 401K. Some other ways to reduce your AGI would be to ask if you can defer any income to the following year. There are investments (for example, natural gas partnership programs and others) here the money you invest can decrease your AGI and thus make you eligible for the adoption tax credit. These types of investments could be a great opportunity for you. There are risks to investing in all investment including this one. If this is something you are thinking about you can set up a webinar with us to go over all the risks and understand the tax savings in full.

+ Q: First of all, thank you so much for being on the Creating a Family adoption tax credit show. It was very informative and helpful. You mentioned that you will have to file a paper return for 2010 and 11 if you claim the adoption tax credit that year. For foreign adoptions or international adoptions, you gave some things that had to be attached because the adoption has to be final. What has to be attached to a return for a Domestic adoption that has not been finalized, but part of the adoption credit is being claimed from prior year out of pocket expenses?
A: Yes, for 2010 & 2011 if you are claiming the adoption tax credit you must file and mail a paper return. For the domestic adoption tax credit that isn’t finalized, this is the order on how you take the credits:

    • for expenses paid before the adoption is final, you take the adoption credit in the year after your expenses were paid,
    • for expenses paid in the same year that the adoption is final, you take the adoption credit in the same year, and
    • for expenses paid in the year after the adoption is final, you take the adoption tax credit in the year the expenses were paid.

For example, you adopted a child in 2009, but you paid adoption expenses in 2008, 2009, and 2010. Your 2008 adoption expenses are taken on your 2009 tax return (they must be delayed by one year because the adoption was not final). Your 2009 adoption expenses are taken on your 2009 tax return (because they occurred in the same year as the adoption became final). You take your 2010 expenses on your 2010 tax return. In this example, your 2009 adoption expenses include costs incurred in both 2008 and 2009.
Substantiating Documents For the Federal Adoption Tax Credit
The Internal Revenue Service announced further guidance regarding the adoption credit. Starting with 2010 tax returns, people will need to submit documentation with their tax return to prove they are entitled to the adoption credit. Individuals will need to attach copies of various documents to their tax return and mail their tax return to the IRS for manual processing. That means, taxpayers who are claiming the adoption credit will not be eligible to electronically file their return. Acceptable documents to substantiate that an adoption has become final include:

      • An adoption order or decree,
      • A Hague Adoption Certificate,
      • An IH-3 visa, or
      • Foreign adoption decree translated into English

If an adoption is not yet final, taxpayers will need to include documents such as:

      • an Adoption Taxpayer Identification Number for the child,
      • Completed home study by a placement agency,
      • Hospital document authorizing the release of a newborn to the adoptive parents,
      • A court order, or
      • An affidavit (original) or statement (notarized) from an adoption attorney or government official

    + Q: We have read conflicting reports online even on accountant's websites as to whether the adoption tax credit will be refundable in 2012. Could you share with us your understanding of this? Thank you.
    A: My understanding is at this time in the law (unless Congress changes) the tax credit for 2012 will be at least $12,170 (indexed for inflation), but it will not be refundable. [From Dawn: There will be lobbying efforts this year to try to keep the adoption tax credit as a refundable credit. We will keep you up to date with what is happening and what you can do through our weekly newsletter. Sign up for it on upper left hand side of all pages of the Creating a Family website.]

    + Q: If we technically adopted her in China in Dec 2009 but did not come home with her till Jan 1, 2010, and did not re-adopt her through our state till probably April, than are we allowed to take the extra 1000 that was added to the credit? I guess what I am asking is, which date does the IRS consider it to be finalized, the Dec 2009 date or the April 2010 date?
    A: If the child is a foreign national, which in this case she is, then you take the adoption tax credit only in the year when the adoption becomes final. For any expenses paid in the year after the adoption is finalized, you can take a credit for those expenses in the year that you paid them. The IRS stated in Oct. 2010: “The date that parents finalize an adoption is crucial in determining when they can claim adoption related expenses for the adoption tax credit. The IRS has issued new guidance in Revenue Procedure 2010-31 concerning when adoptions of foreign nationals are considered final. For adoptions from a Hague Convention country and finalized in the foreign country, the adoption is considered final for tax purposes when the sending country enters a final decree of adoption or the State Department issues a certificate. Foreign adoptions that are finalized in the United States, the adoption is considered final for tax purposes when a state court issues a final decree of adoption. Taxpayers may amend their 2008 or 2009 returns if their foreign adoption is considered final under these new rules.”

    + Q: I just listened to Dawn's radio interview with you. First, let me say thank you! I really appreciate you offering your email address for us non accounting folks to ask you questions. I actually do budget for the Federal Government and I think nothing like an Accountant. In November 2010 our baby girl was born. We drove from Maryland to Memphis to get her. Her adoption has not been finalized as of yet. However, we did have three failed adoptions in 2010. Can we claim those failed adoption expenses on our taxes and then file her expenses in 2011? I have already requested a ATIN so that I can simply claim her on my taxes.
    A: First, the IRS says to treat the qualified adoption expenses for a failed adoption the same way that you would treat adoption expenses for an adoption that was not finalized prior to the end of current tax year. In the past, in order to claim adoption expenses you needed the child’s social security number (SSN), an adoption taxpayer identification (ATIN), or an individual taxpayer identification number (ITIN). In many cases, it is impossible to get that type of specific information for a child that you were not able to adopt. The IRS form 8839, information publication indicates that taxpayers can complete as much information as they can about the child on line 1 of the form. In the columns that you do not have complete information for, such as the SSN, write the words “See Attached Statement.” On a separate piece of paper, write your name and social security number, the name and address of any agency or agent (such as an attorney) that assisted in the failed adoption. Indicate that you had a failed adoption and therefore do not have the SSN, birth date, or whatever your missing information is. Then attach the statement to your tax return. Because you have had more than one failed adoption for eligible children, the IRS says you should complete the “Child 1” line and “Child 2” line. This is a new law, and from all the research I have done it does appear that your adoption would have to be finalized for 2011 first before claiming all the expenses. It would be a combination of all 3 failed adoptions and the 1 final adoption that you would be at the $13,170.00 total limit.

    + Q: We had a failed adoption in July 2010. Are we able to claim those failed adoption expenses for the 2010 tax year? Or is it like in the past tax years where you had to wait 1 year before filing for the failed adoption?? ?I can't seem to find anything anywhere that helps me answer this question and on top of it all our accountant (aka tax guy) doesn't seem to be able to find the answer either, but only refers to the OLD way (waiting a year).? I sure would love to be able to claim the expenses for the 2010 tax year.? ?I would soooo appreciate your help and guidance.? ?If you find the answer...will you send us info on where you were able to find it from?
    A: If you adopt domestically and the adoption fails, then you can take the federal adoption tax credit the year after your adoption has failed. So if this year (2010), you are in the process of adopting domestically, and spend $7,000 on adoption related fees and birth mother living expenses and the birth mother changes her mind, you can take the tax credit of $7,000 when you file your 2011 taxes in 2012. If you pay, for example, $3,000 in federal income taxes, you may be able to receive the other $4,000 as a refund from the IRS. Of course, you have to wait until 2012 to receive those funds. I got this information out of a book, Reclaiming Adoption and also confirmed with the IRS.

    + Q: My specific question is we have an adoption decree for our child that we are adopting in Ethiopia for the year of 2010, but our child will not be home until 2011. Are we able to take the refund for our 2010 taxes?? There seems to be a lot of different options on this! Was curious if you knew that correct answer!
    A: It is a bit confusing…have you filed an application to determination of suitability to adopt a child from a convention country? It seems that if this has been filed, you would be able to take the adoption tax credit.

    Income taxes are individual and complex.  The information provided here is not a substitute for professional financial advice and should not be relied upon without consulting your tax advisor.

    05/02/2011 | by Q&A with the Experts | Categories: Adoption, Adoption Q&A with the Experts | 2 Comments



    2 Responses to Adoption Tax Credit FAQ

    1. Ann says:

      I adopted my foster child in 2015, finalized in early November. I will receive a refund and will not qualify for the adoption credit due to low income. Can I claim her as a foster child using her old SSN (rather than reporting an adoption in 2015 with new SSN), since she was a foster child the majority of the year? Will that effect my ability to carry the credit forward if my income increases in the next five years?

      • Dawn Davenport Dawn Davenport says:

        Ann, sorry, we don’t have an answer for that specific question. This would be a great question to ask on the annual Creating a Family Adoption Tax Credit Radio show. For now, your best best is to contact NACAC. I believe they will answer specific tax questions via email on foster care adoption only. If you still need an answer next year (highly unlikely, I know) send it to me and we’ll ask it on next years Adoption Tax Credit show.

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