Adoption Tax Credit

Claim Your Adoption Tax Credits

Claim your adoption, child, and stimulus tax credits in 2022.  If your family finalized an adoption in 2021, Heart of Adoptions Alliance has great ways to find financial relief. When visiting with your accountant or tax preparer, ask about the Federal Adoption Tax CreditChild Tax Credit, and Stimulus Tax Credits. You may qualify for all three.

Federal Adoption Tax Credit

A tax credit means you can apply credited monies to overall federal income tax liability.  In other words, you save money by reducing the taxes you already owe. This credit offers up to $14,440 per adopted child under age 10 (or physically or mentally dependent on care), not including stepchildren.

Parents must fall within these income requirements:

  • A modified adjusted gross income below $216,660 (full credit)
  • Between 216,660 and $256,660 (partial credit).

If you or your child don’t meet the requirement, you can claim a credit based on qualified adoption expenses instead. These are reasonable and necessary expenses paid to complete the adoption.  The expenses cannot have been reimbursed elsewhere. If expenses exceed $14,440, the claim is capped at $14,440 per child.

International adoption rules require parents to claim the credit in the same year the adoption is finalized.  However, parents who adopt in the US can claim the credit the year the adoption is finalized; or credit may be claimed the year expenses were incurred.

Foster Care and Special Needs

Families who finalize the adoption of a special needs child who meets the eligibility requirements can claim the full credit of $14,440. A child with special needs must be in US foster care and receive adoption subsidies or assistance including a monthly payment from Medicaid or reimbursement of nonrecurring expenses. Your adoption agency can confirm:

  • The child was a citizen or resident of the US or its territories at the time the adoption process began.
  • Whether a state rules a child cannot return to their parents’ home.
  • The state determines the child is ineligible for adoption unless assistance is provided to the adoptive parents.  Factors considered are age, ethnicity, minority or sibling group, and medical conditions, including mental or emotional handicap.

The Child Tax Credit

The Child Tax Credit is fully refundable regardless of earned income for children up to 17 years old. If you don’t have any tax liability (don’t owe money on your taxes), you may receive a refund.

Depending on your family’s federal income tax liability in 2021 and over the next five years, an accountant or tax preparer can find a way to help you receive the full credit from your federal income tax liability or increase your refund with the adoption tax credit.

Also, if you don’t have federal income tax liability this year, you can claim your tax credit and carry it forward to future years when it may become refundable again.

Claiming stimulus checks as a Tax Credit in 2021

Parents of children born (or claimed as dependents) in 2021 can claim a “recovery rebate credit” on their income tax returns up to $1,400 per child if they haven’t received all of their stimulus check money yet. According to the IRS, you are eligible if:

  • You meet the income qualifications below and have a child born in 2021. The child tax credit is up to $3,600 per child.
  • Your family added a dependent, including a parent, nephew, niece, or grandchild, on your 2021 income tax return if they were not a dependent on your 2020 taxes. The credit allows up to $1,400 per new dependent.
  • You’re a single filer with an income above $75,000 in 2020 but a lesser income in 2021. In this instance, you may claim up to $1,400 per person.
  • You’re a  married couple filing jointly and had incomes above $150,000 in 2020 but have a lesser income in 2021. You may claim up to $1,400 per person.
  • You’ve filed Head of Household and had an income above $112,000 in 2020 but a lesser income in 2021. You may claim up to $1,400 per person.

IRA and 401K Withdrawals After a Finalized Adoption

What’s more, new parents, including adoptive parents, should also be aware of the SECURE Act of 2019. It lets parents withdraw up to $5,000 out of their IRA’s or 401(k) plans after their child is born or has completed the adoption process without having to pay the 10% early withdrawal penalty. Before the SECURE Act, if you distributed pre-tax money under the age of 59½, you had to pay income tax plus a 10% early withdrawal penalty from the IRS.

Consequently, after a child’s birth or finalized adoption, a parent has up to 12 months to take $5,000 out of either an IRA or a 401(k) plan and avoid the 10% early withdrawal penalty. If both parents have a retirement account, they can each distribute up to $5,000 for a total of $10,000.  Parents can repeat the distribution for each child.

In addition, parents also have the option to repay the amounts to their retirement account in addition to the annual contribution limits. The SECURE Act does not automatically apply to all 401(k) qualified employer-sponsored retirement plans.  Contact your third-party administrator to amend your plan.

Lastly, our law office offers resources and advice regarding claiming your adoption tax credits. Contact us for more ways an adoption law firm can help balance the cost of adoption.  Email us at [email protected].  Call us via 800-874-4916.

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