International Adoption Tax Benefits and Credits – 2020 Edition


About 135,000 children are adopted in America every year — from the foster care system, private domestic agencies, family members, and other countries. One of the biggest misconceptions about adoption is that adoptive parents need to be rich or have their own home. However, even people who have fears that they may be short in budget should not be afraid to see if they are qualified to give homes to children in orphanages or foster care institutions such that financial grants and aids are actually available and accessible through various charity organizations

International Adoption Tax Benefits and Credits

Even the government gives high regard to the act of adoption. Its efforts extends to easing the financial burden of compassionate couples or individuals, the adoptive parent/s.

Adoptive parents with tax liabilities are given a non-refundable adoption tax credit, a tax incentive that allows them to deduct the amount of the credit from the total they owe the state, which can last up to 5 years. The credit is $13,810 per child for adoptions finalized in 2018 and $14,080 per child for adoptions finalized in 2019. 

Aside from the adoption tax credit, there’s also “benefit exclusion” in the same amount as the tax credit. The adoptive parents’ employer will help them pay for the qualified adoption expenses and is excluded from their taxable income. The maximum amount available for these benefits will continue to grow each year with the cost of living; hence, an expected rise for the year 2020. 

Additionally, states also offer adoption tax benefits in addition to the federal adoption tax credit. 

The adoption costs from foster care systems, private domestic agencies for domestic and international adoptions could take up to $10,000 to $40,000 more or less depending on the type of adoption program. 

With costs like that, the idea of international adoption may be financially intimidating to some. However, the State extends its support to hopeful adoptive parents. With that said, the following are the tax benefits and credits adoptive parents will receive once international adoption is finalized.

THE FEDERAL ADOPTION TAX CREDIT

Below is a table showing the adoption tax credit of 2019 and of the previous years. In 2020, a rise in the amount is expected, along with the rise in the cost of living. There was a time when the credit is refundable, from 2010 until 2011, but it has been changed to a non-refundable and has stayed as is until the present.

YearAdoption Tax Credit
2015$13,400
2016$13,460
2017$13,570
2018$13,840
2019$14,080

The credit works by making the adoptive parents’ tax liability lesser and even completely zero. For instance, if the tax liability is $13,500, then with the 2019 tax credit of $14,080, liability is brought down to zero. Hence, there is $580 remaining in the credit; however, it does not mean that this remaining amount will generate a tax refund as it is non-refundable. What can be done, nevertheless, is to use up the remaining tax credit for the following years up to 5 years until it is used up or gone. Adoptive parents, thus, have six years to use the credit – the year they first claimed the credit plus five additional years

Moreover, since the adoption tax credit is non-refundable, people with zero tax liability cannot claim the tax refund. The tax credit, thus, is only applicable for those who have tax liabilities. However, those who do not have federal income tax liability are still encouraged to claim the credit and carry it forward to future years since the credit may become refundable again sometime in the future as it was from 2010 to 2011. Also, it is important to note that credit does not mean deduction; hence, a dollar for dollar reduction of federal tax, rather than a reduction of taxable income, such as with a mortgage payment.

The adoption tax credit amount is given to adoptive parents for every adopted child; thus, two adoptions would mean two tax credits. There is no limit to the number of credits adoptive parents can claim if there are multiple adoptions. If there are more than three adopted children, there will be a need for a second Form 8839 to list each of the children.

Married couples must file a joint tax return in order to take advantage of the credit. Otherwise, if filing separately, they cannot claim the credit unless they meet the following requirements:

  • Has lived apart from the spouse in the last six months of the year.
  • The eligible child lived in the home for more than half of the year.
  • The adoptive parents provided more than half the cost of maintaining the home.

Who are eligible for the adoption tax credit?

International Adoption Tax Benefits and Credits

Adoptive parents who are eligible for the adoption tax credit should qualify as the following:

  • Adoptive families with a modified adjusted gross income below $211,160 for a full tax credit.

Those whose incomes are within $211,160 to $251,160 can claim partial credit, and those with incomes above $251,160 cannot claim the credit.

  • Adoptive parents of children under age 18.

Children who turn 18 by the year the adoption is finalized may not qualify for the tax credit, or only the expenses incurred before the child turns 18 will be eligible.

  • Adoptive parents of special needs children who are unable to physically or mentally take care of themselves. 

Adoptive parents who adopt a child with special needs can claim the full credit even without documenting the expenses and regardless of whether they have qualified adoption expenses at all.

Who is considered a child with special needs?

The definition of a child with special needs varies from state to state, but conditions may involve the following:

  • Ethnic or racial background
  • Age
  • Membership in a sibling group
  • Medical, physical, or emotional disabilities
  • Risk of physical, mental, or emotional disability based on birth family history
  • Any condition that makes it more difficult to find an adoptive family

International Adoption Tax Benefits and Credits

However, according to title IV-E of the Social Security Act, a child with special needs must also meet the following two requirements to be eligible for Federal adoption assistance:

1. The child cannot or should not be returned to the birth parents.

2. An unsuccessful attempt was made to place the child without adoption (financial) assistance, except in cases where such a placement would not have been in the best interests of the child or youth.

Other than the tax credit, a child with special needs receives adoption subsidy or adoption assistance program benefits, which can include a monthly payment, Medicaid, or reimbursement of nonrecurring expenses. However, being disabled does not automatically qualify a child with special needs. No child adopted internationally or adopted from foster care is considered special needs for the adoption tax credit. In fact, about 10 percent of children adopted from care do not receive adoption assistance support. Therefore, if the child does not receive adoption subsidy or adoption assistance benefits, the adoptive parents should have qualified expenses to claim the adoption tax credit.

QUICK QUESTION: Can the federal adoption tax credit be applicable for adoptions other than special needs adoption? Can adoptive parents who adopt healthy children receive the Credit? 

Yes. The federal adoption tax credit is for all types of adoptions, whether international, domestic private, or public foster care. However, stepparent adoptions or cases by which as spouse adopts the other spouse’s child are exceptions; these cases are not deemed applicable for the federal adoption tax credit.

What are the qualified adoption expenses for the adoption tax credit?

 The qualified adoption expenses for the adoption tax credit are any expenses directly related to and for which the principal purpose is the legal adoption of an eligible child. Below are lists of qualified and not qualified adoption expenses. 

 Qualified Adoption Expenses

  • Reasonable and necessary adoption fees
  • Court fees
  • Attorney fees
  • Travel expenses
    • Fare
    • Accommodation
    • Meals
  • Re-adoption expenses

Non-Qualified Adoption Expenses

  • Expenses paid for with state or government assistance or federal program
  • Expenses that violate state or federal law
  • Expenses paid or reimbursed by employer or organization
  • Cost of adopting a stepchild or one spouse’s child
  • Cost of surrogate parenting arrangement
  • Allowed as a credit or deduction under any other provision of federal income tax law

The most important thing to note in claiming the tax credit or upon completing the adoption process is keeping records of the qualified adoption expenses listed above, financial records, legal agreements, and written adoption paperwork such as home study paperwork. Financial records include invoices, bank statements, and copies of written checks. Usually, audits in adoption tax credit matters are done by correspondence; thus, the adoptive parents and their accountant will have to typically communicate with the Internal Revenue Service (IRS) by mail and fax. Tax audits can only occur for three past tax years, so adoptive parents only need to retain records related to adoption expenses for four years.

However, for international adoptions, adoptive parents may be required additional paperwork and registrations other than those that are already mentioned once the child has been adopted abroad and resides in the United States (US). Additional documents include a US social security number and card, a passport, a US birth certificate, and US re-adoption, which may be needed for a child who permanently resides in the United States. Re-adoption is a means of documenting the parent-child relationship under US law.

When and How to claim the adoption tax credit?

Adoptive parents who adopt internationally cannot claim the credit until the year of finalization.

To claim the credit, adoptive parents will have to review the Form 8839 instructions that’s available on the IRS website, very carefully to be sure that they apply for the credit correctly and to see changes if there are any. Then, they will have to complete an IRS Form 8839 available still available at irs.gov in early 2020. Next, they will have to submit it with their Form 1040 when they file their taxes for the year. Tax software will create this form for taxpayers. These instructions are necessary in order to calculate how much of the credit will be used. 

With all that being said, the instructions state that adoptive parents or taxpayers may e-file their tax return to claim the adoption tax credit. There is no requirement to paper file the return. Also, there is no requirement to submit documentation, but it should be readily accessible nonetheless in case it will be needed that they refer to records at a later date.

BENEFIT EXCLUSION

What is a benefit exclusion?

A benefit exclusion is the money that the employer counterparts to the adoptive parents to help pay for the adoption. It is not part of their taxable income. The benefit exclusion can be worth $14,080 on top of the tax credit the adoptive parents may be eligible for.

If the adoptive parents’ employer offers this adoption assistance program, the employer will report these benefits on the W-2, Box 12, and mark it with the code “T.”

Both the federal adoption tax credit and the benefit exclusion for expenses related to adopting a child can be claimed. However, both can’t be claimed for the same expenses. For instance, if the federal adoption tax credit is already used up for the court and attorney fees, the benefit exclusion should not be used for the same court and attorney fees.

CHILD TAX CREDIT

What is child tax credit?

The Child Tax Credit, as of 2018, offers up to $2,000 per qualifying dependent child 16 or younger at the end of the calendar year. The child tax credit can reduce the tax bill to zero and might generate a refund on anything left over for the taxpayer. However, only $1,400 of it can become the refundable Additional Child Tax Credit and is depending on the family’s earned income. The remaining $600 is a non-refundable Child Tax Credit. This credit is going to supersede the federal adoption tax credit when reducing the tax liability.

A family should be able to complete the Child Tax Credit Worksheet in IRS Publication 972. Software and tax preparation consultants automatically calculate these amounts for the taxpayers. If able to answer “Yes” on the last line of the Child Tax Credit Worksheet, the taxpayers may be eligible for the Additional Child Tax Credit, which is a refundable credit, which means that they can claim the credit regardless of their tax liability. To claim the Additional Child Tax Credit, adoptive parents should be able to complete IRS Schedule 8812.

RELATED QUESTIONS

Can the adoptive parents still use the adoption tax credit if on the year they claimed it, they don’t have zero tax liability? 

Yes. Adoptive parents who are taxpayers have a total of six years to use the credit—the year they first are eligible to claim it and the next five years. It is highly encouraged that those adoptive families who file taxes to include a Form 8839 in order to claim the adoption tax credit even if there is any uncertainty to which they can be able to use the credit in the first year. The Credit is open for the possibility that adoptive families may have a tax liability in the coming years. Claiming the credit in advance would save them from needing to go back and amend taxes by the time they are already able to benefit from the Credit.

If the adoption is unsuccessful, will the hopeful adoptive parents receive any amount? 

Yes. In the US, as long as money is spent on qualified adoption expenses, there will be a due amount the prospective adoptive family can receive. This type of case is treated as a non-finalized adoption or treated in the same manner as expenses paid for adoptions, not final by the end of the year. The prospective adoptive family must wait, however, for a year after they have incurred the expenses. Therefore, if they were able to spend on qualified expenses for adoption in 2018 and the adoption has failed or is unsuccessful, they can claim the amount with their 2019 taxes, typically filed in early 2020.

How many times can an adoptive parent claim an adoption tax credit? 

Once only as the federal adoption tax credit is a one-time credit per child. If adoptive parents adopted in 2018, for instance, they could claim the credit in the year of finalization of the international adoption. Then, if there is still some remaining credit amount by the end of the year after it being applied on the tax liability, the amount can be carried over to the next year and the following years until all of it is used up or until the total of 6 years has already passed. However, for unsuccessful adoptions, as discussed above, the credit can be claimed after the year the prospective adoptive parents have spent the expenses. Then, if the adoption is finalized the next year and they have not reached the maximum Credit allowed, the remainder of the credit can be claimed in the subsequent year.

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Eni Gordove

is a freelance writer who has a degree in Bachelor of Arts major in Political Science. She has also taken Bachelor of Laws, making her adept in domestic and international adoption regulations and processes.

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