Understanding how the adoption tax credit works can be a bit confusing. After my husband and I brought our twins home, we knew we needed assistance with taxes from someone who had experience in working with families who had adopted. After speaking with a few friends who had worked with Dave Lemaster, owner of Superior Tax Prep, we opted to use his services. We continue to use him every year since and he has been wonderful to work with. With over 11 years of experience, he is very knowledgeable on the adoption tax credit and has always been very quick to answer all of our questions.
I reached out to Dave to see if he would be interested in providing a brief summary of how the adoption tax credit works and he was more than happy to provide us with this helpful information.
When a family adopts they are allowed to claim a tax credit on their income tax return for expenses incurred throughout the adoption process. It is advised that individuals should seek professional tax help when looking to claim the adoption tax credit to ensure it is handled properly. In general adoption expenses are claimed on the tax return in the year the adoption is finalized. But for any domestic adoption and foster care adoption qualifying expenses paid before finalization can only be claimed in the tax year following the year of expenditure (i.e. 2018 adoption expenses could not be claimed until the 2019 filed tax return in early 2020). When the adoption has been finalized any remaining expenses not already claimed can be claimed. For an international adoption expenses cannot be claimed until the year of finalization. If there are expenses in a year after finalization and you still have adoption tax credit left you claim them on the tax return for the year paid.
Items that can be claimed as adoption expenses are adoption fees, agency fees, attorney fees, court costs, travel expenses (including meals and lodging) while away from home, etc. Basically any reasonable adoption expense paid throughout the adoption journey. Families should pay special attention to keep receipts for all adoption related expenses so that when it comes time to file for the adoption tax credit there will be no setbacks and trying to track information down.
There are two kinds of tax credits; non-refundable and refundable. A refundable credit will reduce your income tax owed (i.e. does not reduce self-employment tax) and if there is any left it will refund you the remaining amount of the credit. A non-refundable credit will only reduce your tax owed, but any remaining credit amount will not be refunded. The adoption tax credit is a non-fundable credit up to $14,080 per child for a 2019 finalized adoption. This does not mean that when you finalize you will get the full amount in the year of finalization. Those eligible to claim the adoption tax credit can only benefit in a given year up to the amount of their tax liability. For 2018 look at form 1040, line 11 for tax liability. The benefit is limited because it is a non-refundable credit, which means it cannot exceed over your tax liability for the year. Other credits you’re claiming will impact the claimable amount as well.
The good news is that any amount of the adoption credit not used in the initial year can be carried forward for up to 5 years or until the credit runs out. If after the 5 carry forward years there is still adoption credit remaining it expires. Back in 2010 and 2011 the adoption tax credit was a refundable credit and there are legislators trying to make it refundable again.
Understanding the adoption tax credit is complex, but not impossible! Feel free to reach out to Dave Lemaster with any questions regarding the adoption tax credit or his services.
Superior Tax Prep , Dave Lemaster, Owner
(218)-591-3892 / email@example.com
Dave and his wife Amy are the proud parents of four children, 3 through adoption (including twin boys & their daughter) and one son biologically. They adopted with the help and support of Christian Adoption Consultants for both their adoption journeys. Dave has a B.S. in Accounting from the University of Wisconsin-Superior and MBA through Liberty University Online. He has been in the accounting/tax field since 2008 and has also operated his own tax business since 2014 where he has gained extensive knowledge about the adoption tax credit which helps to serve adoptive families.