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Tax Benefits of Adoption

When you take care of someone, you are also taken care of! It’s like Karma. You do good, you get back good in return. Ben and Stephanie had adopted a baby girl because they felt their family wasn’t complete otherwise. This act of adopting children is not only a good and kind deed where another human being is benefiting from your benevolence, but in doing so you get assistance from Uncle Sam.

This week we will discuss some of the tax benefits of taking advantage of the adoption credit opportunity. This tax credit is taken in the year the child is awarded to you by the courts, as your adopted child and the adoption is final. Sometimes, you may pay for the adoption money early, last year for example, but when you finalize the adoption is when you get the tax credit.

Here are some points to consider for expenses used as an adoption credit:

  • All expenses used to adopt a child, are given as a tax credit for up to the limit on IRS Tables

Adoptions prior to 2012 receive a refundable tax credit. Today, the tax credit is non-refundable. This means you will not get a check from the IRS for adoption, just reduce your taxes down to zero. Refundable credits may give you a check for the credit amount. This is one tax benefit that does NOT require you to keep receipts for the adoption expenses. Be sure to ask us about whether you need to keep receipts or not for this benefit.

  • Each dollar of tax credit may be equivalent up to $3 of tax deduction

This is because a tax credit reduces your tax directly, while a tax deduction only reduces the income which is taxed, but the true benefit depends on your tax bracket.

  • The credit starts to phase out when your household income exceeds certain IRS limits

The IRS publishes annually of the income phase out for this limit. Ask us what the phase out limit is for this year.

  • Employers can also pay for adoption expenses and receive a tax credit of the same amount as individuals

Self-employed individuals may claim a tax credit through their C-Corporation, but owners of S-Corporations claim the credit on their personal returns.

  • For 2020 and later you can distribute (Penalty Free) up to $10,000 per parent from retirement accounts

This is part of the new SECURE Act, that allows parents to take money out of retirement accounts in order to help pay to adopt a child.

  • Special needs children qualify for even bigger tax credits

Be sure you understand the “special needs” description. It is wider in scope than you think. For instance, abused (defined more than just sexually for this tax benefit) children may qualify as special needs


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