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Financial Incentives for Adoption

Internal Revenue Service

The Internal Revenue Service offers incentives for families adopting children.

Federal Adoption Tax Credit

information courtesy of North American Council on Adoptable Children

Since 2003, families who adopted a child with special needs from foster care could claim a federal adoption tax credit even if they had no adoption expenses. Other adoptive families are also eligible for the credit, but must document qualified adoption expenses.

The tax credit became refundable for 2010 and 2011. A refundable tax credit is one you get back regardless of what you owe or paid in taxes for the year.

Families who adopted from 2005 to 2009 may be able to benefit from the refundable credit because credits from those years can be carried forward until 2010. (Families who adopted in 2003 and 2004 may be able to take some limited advantage of the credit but will not benefit from refundability. Families who adopted earlier will not benefit from the credit if they did not take it already.)

The amount of the credit is based on the year the adoption finalized (see table on right):

2011 $13,360
2010 $13,170
2009 $12,150
2008 $11,650
2007 $11,390
2006 $10,960
2005 $10,630
2004 $10,390
2003 $10,160

The credit is claimed one time for each adopted child with special needs. Below, we explain the basics of the adoption tax credit.

To be eligible for the credit, you must:

  • Have adopted a child other than a stepchild — Children who receive a monthly adoption subsidy payment have been determined by the state to have special needs, so these children are eligible for the full tax credit without documenting expenses. Families who adopted children without special needs are also eligible, but need to document expenses.
  • And be within the income limits — How much of the credit you can claim is based on income. In 2010, families with a federal modified adjusted gross income above $222,520 cannot claim the credit; families with incomes above $182,520 can claim part credit. Adoptions from previous years had different income limits.

You will need to prove the adoption by providing the IRS with a copy of the adoption decree. Families who adopted a child with special needs must also provide a copy of the adoption assistance agreement.

Penalties Assessed as a Result of the Adoption Tax Credit

Some families have received letters from the IRS stating that they owe thousands of dollars or that their refunds have been significantly reduced, primarily as a result of a penalty assessed for claiming a refund that the IRS has not approved. As we understand it, the IRS can assess taxpayers a penalty of 20 percent of any refund they claim that they are not due.

The letters from the IRS typically include a Form 886-A, Explanation of Items, which details why the IRS has not approved the adoption tax credit. The most common explanations we have heard are: (1) missing documentation; (2) the examiner's rejection of the adoption assistance agreement as proof of special needs; and (3) calculation or carry forward errors.

If you receive such a letter and you claimed the credit correctly, you should write to the IRS explaining why you disagree, and either re-send any documentation requested or clarify that the adoption assistance agreement IS proof of special needs (highlight the IRS's own FAQs—question 13.

Once your refund has been approved, the penalty will disappear.

However, we also have spoken to several parents who made mistakes in claiming the credit, such as:

  • claiming the credit more than one year; for example, requesting $12,150 for an adoption in 2009 and then seeking an additional $13,170 for that same adoption in 2010
  • claiming the full credit for an adoption that does not meet the IRS's definition of special needs (such as an international or private adoption of a medically fragile child), when expenses were less than the maximum credit

If you are aware that you made an error but haven't yet received a penalty letter, we recommend writing to the IRS to explain and correct your mistake. Assure them that the error was honest and that you are only seeking the amount that you are due.

If you received a penalty letter based on your error, you can apply for abatement of the penalty using Form 843 (http://www.irs.gov/pub/irs-pdf/f843.pdf). Explain why you made the error, and note that you are seeking abatement under the "reasonable cause" option under 5a. Be as detailed as possible about why the error happened (for example, if you used software that caused the problem, name the software, the date you completed the return, and what happened). We do not know if these penalties will be abated, but truly hope so.

If you have any questions, please contact us at taxcredit@nacac.org.

If You Adopted in 2010

To claim the credit, you complete IRS Form 8839 with your IRS Form 1040. On line 5 of 8839, which asks for qualified adoption expenses, enter $13,170 as long as your child receives adoption assistance. Others should enter their qualified adoption expenses.

If You Adopted between 2005 and 2009 and Claimed the Credit the Year You Finalized

If you finalized in 2005 or later, claimed the credit that year, and carried forward the adoption tax credit on each year's returns, just carry forward the remaining amount of the credit from your 2009 return to 2010. You can claim the full amount remaining as a credit on your 2010 return.

If you claimed the credit the year you finalized, but didn't carry it forward to subsequent years' tax forms, you'll need to amend returns for those years.

If You Adopted between 2007 and 2009 and Didn't Claim the Credit

You must file for the adoption tax credit in the year you finalized the adoption, so you need to amend your tax return for the year the adoption was finalized and any subsequent years, carrying forward the amount of the adoption tax credit that you are not able to use each year. Any part of the credit not paid before 2010 can be used fully with the 2010 return.

If You Adopted in 2005 and 2006 and Didn't Claim the Credit

Adoptions finalized in 2005 or 2006 are more complicated because the IRS allows people to amend returns to claim a credit only for the past three years. The IRS has written, though, that these older credits can be accessed.

If you adopted in 2005 or 2006, you should amend your returns starting the year you finalized. Because it's longer than three years ago, you cannot be paid a refund for the credit in 2005 or 2006. You must still complete the 2005 and/or 2006 return as if you are getting a refund for the credit used, but any credit that could have been refunded in these years will be lost. When you amend your 2007 taxes and forward, you can use any credit due that year. Whatever amount remains after you do your 2009 taxes can be carried over and refunded in 2010. Please note that the IRS may reject your amendment but we encourage you to appeal. A taxpayer advocate may be helpful in the appeal.

If you didn't file in 2005 or 2006 and had sufficient tax liability in 2005 and 2006 to use up the whole credit, you will not benefit. You need to have some credit carried forward to 2007 to get a payment.

If You Adopted in 2003 and 2004 and Didn't Claim the Credit

If you finalized an adoption in 2003 or 2004, the issue about amending returns more than three years old applies so you are less likely to benefit. You cannot carry the credit forward to 2010 when the credit becomes refundable.

A family with significant tax liability may use up all of the adoption tax credit in the years before 2007, but they cannot get a refund for these years. Those families who have a moderate tax liability might be able to carry forward some of the credit to 2007, 2008, or 2009, when they could get a refund for whatever tax liability they had that year.

Tuition Waiver

The Texas state tuition and fee waiver provides exemptions at state supported institutions of higher education to certain youth who were formerly in foster care, adopted youth, and youth in permanent managing conservatorship. Learn more.

Texas and National Adoption Assistance Resources

Post Adoption Services

Information on other programs

                                                                                                                                                                   
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