In 2018, my wife and I adopted two children that we had fostered through Social Services. During the process of paperwork, one of the Social Workers stated that because of both of their situations, there may be some things that our tax preparer needed to be aware of. Both of them were classified as “Special Needs” adoptions, because of the risk categories they were in. They did not qualify for the monthly adoption assistance, but did qualify for Medicaid until they turn 18. I was very surprised to learn of the tax credits for special needs adoptions.
After doing some research and providing my tax preparer the proper documentation, it was determined that we were eligible at the time for a tax credit of $13,800 per child (this is now up to $14,300 for 2020). This tax credit is not refundable. It means we could only use this tax credit if we had a federal income tax liability. We did have a federal income tax liability based on our income. So my wife and I were going through the process of deducting mortgage interest, daycare cost, etc. we were trying to find refundable credits.
The tax credits for the special needs adoptions really helped us out a lot. In total, the amount for us was $27,600 in tax liability reductions. Additionally, if you don’t use all of this in one year, you have up to five years to use it.
Examples
Here are two scenarios taken from a very informative article from the North American Council on Adoptable Children (https://www.nacac.org/help/adoption-tax-credit/adoption-tax-credit-2020/):
Example 1 — A couple adopted two brothers who had been determined to have special needs. The parents had $6,500 in federal income tax withheld from their paychecks, and their tax liability is $7,000, which means they would normally owe $500 to the IRS. Their adoption tax credit is $28,600, and they only have the two children who were both under age 17 at the end of 2020. They first use $1,200 in child tax credit, then $5,800 in adoption tax credit on their 2020 taxes. The couple gets a refund of the $9,700—the $6,500 they already paid plus $2,800 in refundable additional child tax credit, and can carry over $22,800 for up to five more years.
Example 2 — A couple adopted three siblings with special needs. The couple had $1,000 in federal income tax withheld from their paychecks, and their tax liability is $0, which means they would receive a refund of $1,000. They claim $42,240 in the adoption tax credit, but they cannot use it with their 2021 taxes since they have no federal income tax liability. The couple should still file Form 8839 with their 2020 tax return so that they can carry the credit forward for up to five additional years in case their tax liability goes up in the future or the credit becomes refundable.
Adoption Expenses
There are so many other options available when claiming adoption expenses as well. The website listed above has excellent information regarding this. It is a great place to start when learning about these types of tax credits. IRS form 8839 instruction sheet defines qualified adoption expenses as those expenses that are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of a child. Here is a list of qualifying adoption expenses taken from the 2020 instructions for form 8839:
Qualified adoption expenses include:
• Adoption fees
• Attorney fees
• Court costs
• Travel expenses (including meals and lodging) while away
from home, and
• Re-adoption expenses relating to the adoption of a foreign
child.
Qualified adoption expenses don’t include expenses:
• For which you received funds under any state, local, or
federal program;
• That violate state or federal law
• Carrying out a surrogate parenting arrangement
• The adoption of your spouse’s child
• Reimbursed by your employer or otherwise
• Allowed as a credit or deduction under any other provision of
federal income tax law.
https://www.irs.gov/pub/irs-prior/i8839–2020.pdf
I don’t think the tax credits for special needs adoptions is advertised well enough, and adoptive parents need all of the help that they can get.
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