Saturday, March 14, 2015

The 2015 adoption tax credit

  I promise that I will do a post on adoption loans (update: here it is!), as I had said I was working on in this post on adoption grants. Things have been a bit busy around here with my husband spending a couple months working in the trauma unit and me still teaching 4 classes online. But, something came across my radar this week from the Adoptive Families site that I wanted to do a quick post about: the government increased the adoption tax credit! Before you get too excited, they only increased it by $200-- but every little bit helps, right? I figured that I would do a brief overview of the tax credit for those who are in the "how the heck are we going to afford this?" stage, like we are.

Side note: TurboTax software has all of the prompts needed for using the Adoption Tax Credit! So, if you like to do your own taxes, download the Deluxe package from Amazon here and you will be able to put in all of your adoption info, relatively headache free! I was pleasantly surprised!

  For 2015, the maximum adoption tax credit is $13,400. If you make over $241,010 (very specific numbers, there) you are not eligible for any of the credit. If you make over $201,010 but less than $241,010, you will receive a reduced amount based on a phaseout calculation. If you are married, you must be married filing jointly in order to receive the credit. Here's the thing: this isn't a refund. So, you don't get to show all of your receipts and say "Look! I paid $30,000" and receive the $13,400. It is a credit that offsets your tax liability (this number is found on line 47 of your 1040) and gets you a bigger refund. So, if your tax liability is $8,000 and you had that $8,000 withheld from your paychecks, you get it back; then, the remainder rolls over for a maximum of 5 years into the future. This site explains that part of the calculation well.

    Qualified expenses that can be used in the calculation of your credit are any adoption-related fees and expenses, travel expenses, legal expenses, and "other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child."

  Now, where things get tricky is the timing of all of this. The following is the guidelines and example copied directly from the IRS page on adoption credits:

"The tax year for which you can claim the credit depends on the following:
  • When the expenses are paid;
  • Whether it is a domestic adoption or a foreign adoption; and
  • Whether the adoption has finalized in the year.
Generally, the credit is allowable whether the adoption is domestic or foreign. However, the timing rules for claiming the credit for qualified adoption expenses differ between the two types of adoption.
  • A domestic adoption is the adoption of a U.S. child (an eligible child who is a citizen or resident of the U.S. or its possessions before the adoption effort begins). Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment (even if the adoption is never finalized).
  • A foreign adoption is the adoption of an eligible child who is not yet a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final.
Once an adoption becomes final, qualified adoption expenses paid during or after the year of finality are allowable as a credit for the year of payment, whether the adoption is foreign or domestic. Because of these timing rules, a taxpayer may sometimes claim a credit for both prior-year and current-year qualified adoption expenses in the year of finality. Example 4 illustrates the difference.
Example 4. An adoptive parent pays qualified adoption expenses of $3,000 in 2012, $4,000 in 2013 and $5,000 in 2014. In 2014, the adoption becomes final.
If the adoption in Example 4 is domestic, the adoptive parent may claim the $3,000 of expenses paid in 2012 as a credit on the parent’s 2013 tax return. Then the adoptive parent claims both the $4,000 paid in 2013 and the $5,000 paid in 2014 as a credit on their 2014 tax return. The credit claimed on the 2014 tax return includes the $4,000 paid in 2013, because 2014 is the year after the year in which it was paid. The $5,000 is claimed on the 2014 return because 2014 is the year when the adoption becomes final. Since the adoption credit is nonrefundable, the total $9,000 credit claimed on the 2014 tax return reduces any tax liability for 2014. The excess, if any, will be carried forward to the next year."

   We began paying adoption expenses in January of this year (2015). Up to this point, we have paid right around $1,500. If nothing goes through this year, we cannot claim this $1,500 or any of the other expenses we incur in 2015 on the tax return that we will file in February 2016 )I like to get them done early) for our 2015 year. If the adoption goes through in 2016, we will claim all of our adoption expenses (including the $1,500) on the tax return that we will file in February 2017 for our 2016 year. If an adoption goes through this year (2015), we will claim everything on the return that we will file in February 2016 for our 2015 year. So, save every receipt, and don't assume that just because the adoption hasn't become finalized yet that your expenses don't count.  Even if your adoption falls through, you may still be eligible for reimbursement later down the road.


  1. If you adopt a child from foster care, you can claim the entire credit even if you did not spend the money. This is true if the child fits into a "child with special needs" category. Most children in foster care qualify. Some of these include, a child over 5 years old, a minority, sibling group, etc. Most states have programs to make adoption from foster care essentially free, then to get a tax credit along with it is just more of an incentive to get these kids to a forever home.

    1. You are absolutely right. I have focused this blog on domestic newborn adoption not from foster care since that is the experience that we personally had, but there is definitely the option of adopting from foster care. While that method does have its own set of challenges to be aware of, it is a way to avoid the huge expensive that exists for agency/lawyer/facilitator mediated adoption. The need for foster parents is astonishing, so there is often a very short wait for a placement once a foster licence has been approved.

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