For the first time ever, the adoption tax credit is refundable. This is a great change for parents who have adopted children in the past few years, because it means they could file their 2010 taxes and receive a bigger-than-expected refund. Keep in mind that refundable is a good thing when it comes to taxes; it means that even if you don’t owe any additional money to the government otherwise, the credit can make your liability less than zero. The government will owe you money, and you’ll receive a refund check. Here’s a deeper explanation of refundable tax credits.
If you’ve had adoption-related expenses, you can receive a tax credit, which reduces the amount you owe the government dollar for dollar. For the 2010 tax year, parents can receive as much as $13,170 per adopted child. The adoption credit lets you carry forward unclaimed expenses from the five previous years, as well. If you’ve paid more than the maximum in 2009 and claimed the maximum that year, you could claim the excess 2009 expenses for the same child on your 2010 tax return as long as the total claimed for each child does not exceed the maximum.
With the capability of receiving a larger refund due to the refundability of the adoption tax credit, the IRS has increased its requirements for documentation of the adoption. To qualify, taxpayers must complete Form 8839 and include additional paperwork.
While the U.S. tax system is designed for wealth distribution as well as raising money for governmental operations, the existence of refundable credits puts a spotlight on the more controversial aspect of the IRS. Additionally, the adoption tax credit is phased out at an adjusted gross income of $182,520 for 2010. This is a high maximum and will not disqualify most families who adopt children, but it means that the credit exists to help middle and low income families meet the needs of their children.
When it comes to the children’s needs, adopted children classified as “special needs” enable the parents to qualify for the entire credit, even if the family did not pay expenses that reach the total of $13,170 per child. In practice, adoption expenses tend to exceed tens of thousands of dollars, so even the maximum refund does not fully reimburse a family for an adoption.
As a result of the changes this year, a family earning a gross income of $39,000 in 2010 determined that the IRS will be paying them a $54,000 tax refund this year. This family has adopted five children over the course of three years. I could certainly argue that supporting the needs of five children on a $39,000 salary is going to be a challenge, but families manage to make it work.
I’m surprised that this family, as interviewed in CNN Money, did not recognize that their $54,000 windfall would be a perfect candidate for starting a college fund or replenishing savings accounts. The family is free to do whatever they like with a tax refund, but considering the needs of their adopted children might have been a good choice for a priority rather than a vacation. To be fair, I’m not in their shoes, so I don’t know what their needs are. The mother of the family indicates she does want to spend the money wisely, but anyone else receiving this credit should probably consider saving as well as spending.
If you file your taxes online using TurboTax or H&R Block, both of which offer free federal tax filing, the software will guide you through claiming the adoption credit. Meeting with a tax professional in person will be helpful, as well, to ensure you’ve claimed all that you can qualify for.
This credit will be refundable on 2011 tax returns as well, so any family adopting a child will benefit from the more generous tax law as well. Regardless, adopting children for the sole purpose of receiving a tax credit isn’t something I’d recommend.
Updated June 23, 2016 and originally published April 1, 2011.