How can the Adoption Tax Credit help me

August 4, 2014 in Domestic Adoption by Stephen Gardner  |  1 Comments

How can the Adoption Tax Credit help me?

Becky Wilmoth, EA, RTRP at Bills Tax Service

Adoption Tax Credit Specialist

So, you are asking how it works and can it actually help me? Whether you are adopting through the foster care system, privately, domestically, or internationally, the Adoption Tax Credit can be an important part of helping families adopt.

An adoptive family can apply this credit toward their federal tax liability. Meaning, it can reduce what they owe in federal income taxes for the year. It is not a refundable tax credit; however, it is still a great credit at $13,190 for 2014. The credit will be indexed for inflation for the years following. At this point since it is not refundable it will not cover self-employment tax, unfortunately.


Who qualifies for the credit?

  1. You qualify for the Adoption Tax Credit if you adopted a child (except spouse’s child) and paid out-of-pocket expenses relating to the adoption. The amount of the tax credit you qualify for is directly related to how much you spent on adoption-related expenses. Income can also be excluded as taxable through an employer-provided adoption benefit program. Both a credit and exclusion may be claimed for the same adoption; however, both cannot be claimed for the same expense.
  2. If you adopt a special needs child through foster care, you are entitled to claim the full amount of the adoption credit. Each state has different criteria that qualify a child as special needs. The special needs declaration must come from the state in which the adoption was final. The “Subsidy Agreement” has the determination of special needs that the IRS accepts. Some states call it the “Adoption Eligibility Assistance Determination.”
  3. No international adoption is considered special needs for IRS purposes, so it will be for amount of qualified expenses.


How does the Adoption Tax Credit work?

  1. On Line 55 of your Federal 1040 is your tax liability. The difference between your tax liability and your federal withholding is either what you get as a refund or what you owe when you do your tax return.
  2. The Adoption Tax Credit comes in on Line 53 from Form 8839 and takes care of your tax liability up to the $13,190 for 2014. You will get your withholding back and child tax credit drops down to additional child tax credit (if you qualify).
  3. If you do not use all of the credit in the first year you can carry it forward for up to 5 years.
  4. In the event it does become refundable again you will get the remaining amount you have not used as a refund.


What documentation do I need to keep for the IRS?

  1. Final Judgment of Adoption (all adoptions)
  2. Adoption Assistance Eligibility Determination(Subsidy Agreement) that declares the child special needs, if claiming credit for a child declared special needs by your state through foster care (foster adoptions)
  3. A home study/placement agreement completed by an authorized placement agency (all adoptions except foster)
  4. All documentation of paid qualified expenses. (all adoptions except foster)
  5. All documents must be signed and dated. (all adoptions) The IRS will not accept any Home study/Placement agreement, Judgment of Adoption, or Subsidy agreement/Eligibility agreement without it being signed and dated by the proper authorities.


To speak to an Adoption Tax Credit Specialist call or email us.

[email protected]


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