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Adoption Tax Credits

Adoption Tax Credits – Q&A

  • What is the Adoption Tax Credit?

    The Adoption Tax Credit is a non-refundable Federal (IRS) income tax credit available to adoptive parents for qualifying expenses paid in connection with an adoption. In addition to the tax credit, taxpayers who receive payments from an employer for adoption assistance may be able to exclude such payments from their taxable income.

  • What does “Tax Credit” mean?

    A tax credit is a dollar for dollar reduction of your tax liability. This is different from a tax deduction which is a reduction of taxable income.  A tax credit is more valuable to a taxpayer since it provides dollar for dollar savings vs. a deduction which provides savings of only a percentage (15/25%, etc) of the deduction.

  • How much is the credit?

    For 2013, the credit is the lower of your qualifying expenses paid or $12,970.  The maximum credit amount for 2014 has been set at $13,190.  The credit was made permanent as part of the Amercan Taxpayer Relief Act of 2012.  Taxpayers who adopt a child with special needs are permitted to claim the maximum amount of the credit, regardless of how much they pay in expenses.

  • What does “refundable” credit mean?

    A non-refundable tax credit means it can only reduce your tax liability to zero.   It does NOT mean that a taxpayer cannot receive a refund.  Please see the below example for an illustration:

    John & Mary Taxpayer – Joint Return

    Gross Income:

    Standard Deduction:

    Personal Exemptions:

    Taxable Income:

    Tax Liability:

    Adoption Tax Credit:

    Net Tax Liability:

    Taxes Withheld From Wages:

    Tax Refund:

    $80,000

    ($12,000)

    ($7,800)

    $60,000

    $8,108

    ($8,108)

    $0

    $10,000

    $10,000

    In the above example, any adoption tax credit over $8,108 would be carried forward to the next tax year – up to 5 years.  Depending on the taxpayer’s income & deductions, the adoption credit could be fully utilized in one year or spread over several years.

  • When can the credit be claimed?

    It depends on the type of adoption.  Taxpayers with foreign and special needs adoptions cannot claim the credit until the year it becomes final.  Taxpayers with domestic, non-special needs adoptions, in some cases can claim the credit in a year prior to finalization.  A tax professional can help you determine when you are allowed to claim the credit.

  • Can I adjust my tax withholding at work to plan for the credit?

    Yes, you can change your withholding to have less tax taken out throughout the year, as opposed to waiting and getting a big refund at the end of the year.

    Use Form W-4 to adjust your withholding to the appropriate levels to account for the Adoption Tax Credit.

  • Can we claim the Adoption Tax Credit if we file separately?

    No, married taxpayers generally must file a joint return to claim the credit.

  • What expenses qualify for the credit?

    Adoption agency fees, attorney fees, court costs, travel expenses (including meals & lodging) while  away from home, and finger-printing/background check costs, are all qualifying expenses.

    There may be other costs you incur in your adoption that may qualify for the credit.

  • Are there any other tax benefits available?

    The State of Ohio offers an income tax credit of up to $1,500 for Ohio residents with an adoption recognized under Ohio law.

*This material was provided by Jim All, an adoptive parent and CPA in the Columbus area.  He has prepared many tax returns for adoptive parents.   He can be reached at jall@jamisoncpa.com or at 614-794-1771.