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Adoption Credit & Adoption Assistance Programs

Adoption Credit & Adoption Assistance Programs

Since 1996, parents and guardians in America have been eligible for adoption assistance in the form of tax credits and adoption assistance programs after several interest groups began advocating for a reduction in the cost of adoption. The two significant financial benefits available to adoptive parents are federal tax credits and adoption subsidies or adoption assistance programs. 


Adoption tax credit

A federal adoption tax credit reduces your federal income tax in the year in which you adopt a child.

Although it was made refundable between 2010 and 2011, the adoption credit has always been non-refundable and is only helpful to parents who pay a reasonable income tax. Families that qualify were entitled to a maximum credit of $5,000 when the assistance came into effect, and it has been moderated upwards over the years. Last year, the value was $14,300.

The average value of the adoption tax credit has been around $300 million annually. When the affordable care Act made the credit refundable in 2010 and 2011, the value witnessed a 100% rise in claims. This is proof that the non-refundable nature of the tax credit is not helpful to several adopting families, especially those with considerably low-income tax.


How it works

To claim the ATC, during filing your tax returns, families who have made adoption expenses need to file IRS Form 8839, where all necessary adoption expenses information is provided. You also need to file the Qualified Adoption Expenses form and the Form 1040/1040NR.

The adoption tax credit is a non-refundable credit that reduces the federal income tax of the benefiting family when claimed, and the credit covers as much tax liability as possible. If the credit is more than the tax liability or is not fully utilized that year, it could be carried over into the next year and remain creditworthy for five years.



Who qualifies for the Adoption Tax Credit?

Not all adoptions qualify for assistance by the IRS. And not all income earners are qualified. One major exception is when a partner adopts the child of a spouse. There are restrictions based on income as well. For example, those who earn above $256,660 cannot benefit. There are also slight restrictions on intercountry adoption, and the credit is not available for adoptions of stepchildren. But the norm is that once any payment is made to offset adoption expenses for any child under age 18, you qualify, and the tax credit is proportional to the amount spent. If the child has any disabilities or special needs, the amount to be claimed could be higher. In some instances, parts of the parent's income may also be excluded from taxation if the employer provides such assistance. 

For children with special needs, adopting families would also need documents that explicitly declare the child's particular needs. For all adoption cases, the final adoption judgment, as well as a certified home placement agreement, are required documents as well. 

These documentations are necessary because the IRS has discovered several fraudulent claims and has taken the audit of adoption tax credits very seriously in recent years.


Adoption Assistance Programs AAP

The Adoption Assistance Program (AAP) provides different types of incentives to families to facilitate the adoption of special needs children. The program varies from state to state, and the value of assistance depends on the specific needs of the children and the scope of the adopting family. The idea was to encourage the adoption of children who were likely to stay in foster care for too long and help the adoptive families see to the child's long-term needs. 

The benefits accruable to the children include payment of adoption expenses of up to $400 per child and comprehensive medical coverage.

You can find information on each state's requirements to benefit from the AAP at the website of the North American Council on Adoptable Children.


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