(The following post is from Nightlight's Adoption Funding & Adoption Grants Resource Packet, available at our Adoption Funding Resources page.)
Post Adoption Financial and Other Resources
Tax Credit: $13,170
Great news: The adoption tax credit has increased, and you could get a tax refund!!!
The Adoption Tax Credit has been extended another year, and starting this year, it has increased to $13,170. So if you adopted this year or next, you can receive not only a tax credit of $13,170 but for the first time, the tax credit is refundable. Except for the increase in the amount of credit you receive and the fact that the tax credit is refundable, the previous rules remain essentially the same.
What this means to, you, the adoptive families:
The adoption tax credit will not sunset on December 31, 2010; it has been extended to December 31, 2011.
You may apply up to $13,170 of your adoption expenses toward your federal taxes when you file your 2010 or 2011 taxes. If you do not receive the full $13,170 as a tax credit, you may be getting money back from the IRS for your adoption expenses. Yes, money back. If your tax liability for the year of your adoption is less than the amount of credit you are applying for, the IRS will refund the portion of the unused credit. This means you could receive some or all of the balance as a refund on your federal taxes. (The Earned Income Credit is an example of another refundable tax credit.)
What if I adopted 2 children? Do I get double the tax credit/refund?
If you adopted two children, you could have a tax credit up to $26,340 if your total expenses came to $26,340 or more. It is important to note that if your income is too high, you could be phased out of the tax credit. However if your income is low enough, and you paid $26,340 or more in adoption related expenses, you could get a tax credit and a refund. If you adopted three children, the credit/refund could be as high as $39,510, as long as your adoption-related expenses are that high.
This means that if you adopted two children and the adoption fees and expenses came to $30,000, and your federal tax liability was $7,000, you would receive the $7,000 as a credit against your liability; in addition, you could receive the remaining $19,340 back in a refund from the IRS even though you did not pay that in taxes.
What if my employer provides adoption benefits?
If your company has employer-provided adoption assistance, you can receive up to $13,170 in tax-free income. Also, your employer can reduce your salary to pay the adoption benefit so that you can receive tax-free income. This is even more attractive this year because, for the first time, you do not have to pay a lot in taxes to really see the benefit of the credit because you could get a refund for what you do not get in credit.
So if your adoption expenses, including all agency/attorney fees, come to $30,000, and your employer gives you $10,000 as an employee benefit, which is tax-free, and you pay $3,000 in federal income tax, then you could offset your tax liability with $3,000 from the tax credit; you would could then receive the remaining $10,170 as a refund.
We encourage you to talk with your employer, who may not normally offer adoption benefits, to consider providing this benefit to you. You are permitted to reduce your salary by up to $13,170 and instead be given this benefit as non-taxable income. So if your adoption fees and expenses came to $28,000, and your employer gives you $13,170 in tax-free income, you will most likely save in taxes owed overall to the State, to social security, and Medicare, as well as to the federal government. If you are adopting siblings, the employer-provided benefits can double or triple, based on the number of children you are adopting. In addition to receiving tax-free income, you can also receive up to $13,170 as a tax credit and/or refund for your remaining adoption expenses.
If your company is the rare employer who provides more than $13,170 in adoption benefits, then the remaining benefit over $13,170 is taxable. So if you receive $15,000 in adoption benefits from your employer, you will have to pay taxes on the $1,830.
When is a family’s income too high to get the tax credit?
As of last year, the credit began to phase out once a taxpayer’s modified adjusted gross income (AGI) reached $182,180. The credit completely phased out at a modified AGI at $222,180. This means that you cannot claim the credit or employee benefit exclusion at all once your modified AGI is $222,180.
Both the amount of the credit and the phase out are adjusted for cost of living increases. Please speak with your local tax professional for the exact amounts based on the timing of your adoption.
Filing the Tax Form
The IRS released a draft version of the form that eligible taxpayers will use to claim the adoption credit on 2010 tax returns filed next year.
In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their 2010 tax returns one or more adoption-related documents. These documents must be sent by mail with paper tax returns. Normally, it takes six to eight weeks to get a refund claimed on a paper return when all required documents are attached. The IRS encourages taxpayers to use direct deposit to speed their refund.
Taxpayers claiming the credit will still be able to use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.
SC Tax Credits
South Carolina families may be eligible for a $2,000 income deduction on their SC Individual Income Tax return if they have adopted a child with special needs or one who is at risk for special needs. The deduction can begin in the year the adoption was made final. A letter from the adoption agency certifying that their adopted child had a special need or was at risk, should be attached to the family’s tax return. Consult the instructions accompanying state tax returns or a tax advisor.
(Nightlight cannot provide tax advice to your specific situation. This information has been provided in conjunction with attorney John Hine. As with all tax matters, consult with a tax attorney or CPA.)