Adoption Tax Credit Information

I tend to get a lot of questions from families I work with as well as friends who have adopted about the Federal Adoption Tax Credit. It's one of the most confusing parts about adopting a child...and those of you who have adopted know that's saying something. I recently answered some questions for adoptive families who brought their kids home in 2010 and 2011 about the tax credit and thought it might be helpful to post my reply here:

Adoptive Families,

In answer to questions regarding the Adoption Tax Credit, I thought it would be best if I sent all of you the following information about the adoption tax refund for those of you who brought your children home in 2010 or 2011.

To start, here is a link to an explanation of the tax refund on the IRS site along with the forms that need to be filed. Here is a link to FAQs about the refund. This should answer most of your questions.

Adoption Learning Partners also offers a free course entitled Adoption Tax Credit. I'm not sure how up-to-date this information is, but they have great courses, so it's worth checking out.

I have found in talking to people who applied for the tax refund in the past year, that the IRS has changed how they handle this issue. My guess is that is because for 2010 and 2011the tax credit is actually treated as a tax refund. This means that you will receive the total amount you spent in adoption costs up to the maximum allowed amount ($13,360 per adoption federally) as a refund all at one time, regardless of whether or not you paid any taxes for the year. With a tax credit, you only receive up to the amount you actually paid in taxes for the year, and then you can carry forward the tax credit for up to 5 years. (Therefore, if you only pay $2000 in taxes per year, you would only get that much credited to you each year for 5 years for a total of $10,000 towards your adoption costs.) The good news for you is that if your adoption was finalized in 2010 or 2011, you are entitled to a tax refund and will therefore be entitled to the maximum amount regardless of your tax liability. In addition, if your adoption was finalized before 2010, and you are still carrying forward a tax credit, you will be able to receive the remaining credit as a tax refund. The bad news is that, from my understanding, the burden of proof to show the adoption expenses through receipts has increased significantly. In addition, the IRS has tended to lose the paperwork and request it multiple times. Therefore, it's important that you keep copies of all paperwork that you send in with your tax return and make sure your adoption expenses are well documented.

I would also advise you to research your state tax laws since many states also offer tax credits. North Carolina, for instance, provides a tax credit of up to half of the federal refund ($6680) for each adoption in addition to the federal tax credit you are entitled to.

Hope this is helpful!