The Annual CreatingaFamily.org Adoption Tax Credit Guide 2021
As we put yet another strange and unprecedented year to rest and begin the new, our thoughts turn to taxes. No matter how challenging 2021 proved to be, taxes are still a certainty you must face. If you adopted recently your thoughts should be turning to how to maximize the 2021 Adoption Tax Credit. The Adoption Tax Credit for 2021 is $14,440 per child. The 2021 adoption tax credit is NOT refundable, which means you can only use the credit if you have a federal income tax liability.
Our friendly tax expert, Becky Wilmoth, Enrolled Agent and Adoption Tax Credit Specialist at Bill’s Tax Service, provided this introductory guide to the Adoption Tax Credit 2021. If you need more detailed information, check out the CreatingaFamilyEd.org course, Adoption Tax Credit 2021.
It is very important that families understand that the Adoption Tax Credit can be an important part of helping them adopt whether they are adopting through the foster care system, domestically, or internationally. Adoption is rapidly changing — international adoptions have declined significantly and the number of children in foster care is around 400,000. The one thing that has remained constant is the need for families who are adopting or thinking about adopting to understand the financial resources available, especially the federal Adoption Tax Credit.
An adoptive family can apply the Adoption Tax Credit toward their federal tax liability when they file their tax return. This means that the applied credit can reduce what they owe in federal income taxes for the year. It is not a refundable tax credit at this time; however, it is still alive, permanent, and a great credit at $14,440 for 2021.
Please note: the Adoption Tax Credit will not cover self-employment tax, early pension distribution penalty, or first-time homebuyer payback.
Who qualifies for the Adoption Tax Credit 2021?
You qualify for the Adoption Tax Credit if you adopted a child (except your 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 benefits program. Both a credit and an exclusion may be claimed for the same adoption; however, both cannot be claimed for the same expenses.
What Expenses are Covered Under the Adoption Tax Credit?
Qualified Adoption Expenses are allowed under the Adoption Tax Credit and include any expenses necessary for the adoption. Examples of qualified expenses are court fees, home study, lawyer fees, medical examinations/physicals, travel expenses (meals, lodging, airline, gas), agency fees, dossier fees, and any other fees that are directly related to the adoption.
The question most commonly asked is whether the living expenses of the expectant mom paid by the prospective adoptive parents in domestic infant adoptions are a qualified adoption expense under the Adoption Tax Credit. They are not.
A good rule of thumb when determining what adoption expenses to include for the Adoption Tax Credit: when in doubt, use those expenses that you know are covered. Most adoptions, other than from foster care, will exceed the amount of the credit, so simply choose the expenses that are clearly considered “qualified adoption expenses.”
When to Apply for the Adoption Tax Credit?
International and foster care adoptions must be finalized before you can apply for the Adoption Tax Credit. Expenses for domestic adoptions that are not yet final can be taken the year after the expenses are paid or you can wait until the adoption is final.
How Does the Adoption Tax Credit 2021 Work?
Line 47 of your Federal 1040 shows 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 the federal government when you do your tax return.
The Adoption Tax Credit comes in on Line 55 (Other Credits) from Form 8839 and takes care of your tax liability up to $14,440 for 2021. You will get your withholding back (if the tax liability is less than the maximum credit amount) and child tax credit drops down to an additional child tax credit (if you qualify).
If you do not use all of the credit in the first year, you can carry it forward for up to 5 years.
How Does the Adoption Tax Credit Work with Special Needs Adoptions?
If you adopt a child with special needs through foster care, you may be entitled to claim the full amount of the adoption credit even if you did not have expenses. 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 finalized. In order to qualify as a special needs adoption, you must have a signed adoption “Subsidy Agreement” with the state. (Some states call it the “Adoption Eligibility Assistance Determination.”)
No international adoption is considered special needs for IRS purposes, so the Adoption Tax Credit will be for the amount of your qualified adoption expenses only.
What Documentation Do I Need To Keep for the IRS for the Adoption Tax Credit?
- Final Judgment of Adoption (all adoptions)
- 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)
- A home study/placement agreement completed by an authorized placement agency (all adoptions except foster)
- All documentation of paid qualified expenses (all adoptions except foster)
- 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.
Need More Detailed Information on the Adoption Tax Credit?
If this introductory guide has not answered all your questions, please check out the CreatingaFamilyEd.org course, Adoption Tax Credit 2021. The guest experts for our online course are Becky Wilmoth (the author of this guest blog post) and Josh Kroll, the Adoption Tax Credit specialist at the North American Council on Adoptable Children. They are the two most knowledgeable people we know on the Adoption Tax Credit and we are grateful for their expert guidance on this topic yearly.
- The tax code provides an non-refundable adoption credit of up to $14, 440 of qualified adoption expenses (in 2021) for each child adopted, whether via public foster care, domestic private adoption, or international adoption.
- How can you advocate for refundability?
- What is a “credit” and how does it differ from a deduction or some other form of tax savings?
- If you get a tax refund every year, how would you use the Adoption Tax Credit? If you don’t have any federal tax liability, should you still apply the credit to your federal income taxes?
- What type of adoptions are included or excluded? Step-parent adoption? Embryo adoption? Same-sex partner, second-parent adoption? Unmarried heterosexual second-parent adoption? Surrogacy?
- Can you get credit for each adoption you complete even if completed in the same year? What about adopting siblings at the same time?
- What is a Qualified Adoption Expense for purposes of the Adoption Tax Credit 2021?
- When can you claim the Adoption Tax Credit for domestic private adoption? International Adoption? Re-adoption in the US for international adoption? Foster Care Adoption?
- How does the Adoption Tax Credit work with kinship adoptions? What if the child never was involved with the foster care?
- Special Needs Adoption: How does the Adoption Tax Credit differ for adoptions from foster care? What does the IRS accept as proof of “special needs”? Special needs child for international adoption?
- Can you reclaim your expenses for a failed adoption? How?
- What income level is excluded from claiming the Adoption Tax Credit in 2021?
- How long can the credit be carried over?
- Will the Adoption Tax Credit offset self-employment tax?
- How does the Secure Act and Qualified birth or adoption distributions factor in?
- How does the Adoption Tax Credit work in conjunction with employee adoption benefits? For special needs adoption?
- If you adopt, can you still get the Child Tax Credit? How does the timing work? What do you need in order to get the Child Tax Credit for your adopted child?
- How does Advanced Tax Payments work with adoption?
- What type of documentation for the Adoption Tax Credit should you submit with your taxes? What type of documentation should you keep in your records?
- What should you do if you do not have your child’s social security number when you get ready to file your taxes? When should you consider using an Adoption Taxpayer Identification Number (ATIN #) or Individual Taxpayer Identification Number (ITIN #)?
- How to find a tax specialist with training and experience in filing for the Adoption Tax Credit?