Adoption Tax Credit 2021

In the document Revenue Procedure 2020-2045, the IRS listed the Adoption Tax Credit adjusted numbers for 2021. The maximum amount allowed in 2021 is set at $14,660, which is raised from $14,300 in 2020. The tax credit starts to phase out for families with modified adjusted gross income greater than $216,660 and is completely phased out for families with a modified adjusted gross income of $256,660 or more. When filing your taxes in 2021, you will be working with the income that you earned in 2020. Because of this, you must use the 2020 Adoption Tax Credit number of $14,300.

The Adoption Tax Credit applies to domestic, international and foster care adoptions. The Adoption Tax Credit does not apply to surrogate parenting or stepparent adoption. The tax credit is nonrefundable, but unused value can be carried forward and claimed on future tax returns for up to five years. The amount of the credit that is claimable by the adoptive parents is the amount that has been spent on adoption related expenses, up to the limit for that year. An exception to this is in adoption of a special needs child. In that case, the entire credit may be taken, regardless of the amount of expenses incurred.

For domestic adoptions that are not yet finalized, you may claim qualifying expenses for the credit in the year following the year the expense is paid. This means that you can claim the adoption tax credit for expenses paid even if a domestic adoption is never finalized. Expenses paid in the year an adoption is finalized can be claimed on that year’s tax return. Expenses paid after an adoption is finalized can be claimed for year the payment is made.

Travel expenses, meals, lodging, court costs, attorney fees, and other expenses directly related to the purpose of adoption are included as applicable to the adoption tax credit. The credit is scalable with more children. It doubles with two children, triples with three, etc. The Adoption Tax Credit is a credit, not a deduction. That means that if you spend $14,000 on adoption and are assessed $15,000 in federal tax, you would end up owing $1,000 in tax. This is different from a reduction in taxable income, such as mortgage deductions.

Some states have additional adoption tax benefits that apply in conjunction with the federal Adoption Tax Credit. Wisconsin, for example, provides for an additional tax deduction (not a credit) for parents of newly adopted children.

For more information on the Adoption Tax Credit, the National Council for Adoption is a good resource. Adoptions of Wisconsin does not provide tax advice or guidance. Please contact your tax advisor for information on the Adoption Tax Credit.

Adoption Tax Credit

In the document Revenue Procedure 2019-44, the IRS listed the Adoption Tax Credit adjusted numbers for 2020. The maximum amount allowed in 2020 is set at $14,300, which is raised from $14,080 in 2019. The tax credit starts to phase out for families with modified adjusted gross income greater than $214,520 and is completely phased out for families with a modified adjusted gross income of $254,520 or more. When filing your taxes in 2020, you will be working with the income that you earned in 2019. Because of this, you must use the 2019 Adoption Tax Credit number of $14,080.

The Adoption Tax Credit applies to domestic, international and foster care adoptions. The Adoption Tax Credit does not apply to surrogate parenting or stepparent adoption. The tax credit is nonrefundable, but unused value can be carried forward and claimed on future tax returns for up to five years. The amount of the credit that is claimable by the adoptive parents is the amount that has been spent on adoption related expenses, up to the limit for that year. An exception to this is in adoption of a special needs child. In that case, the entire credit may be taken, regardless of the amount of expenses incurred.

For domestic adoptions that are not yet finalized, you may claim qualifying expenses for the credit in the year following the year the expense is paid. This means that you can claim the adoption tax credit for expenses paid even if a domestic adoption is never finalized. Expenses paid in the year an adoption is finalized can be claimed on that year’s tax return. Expenses paid after an adoption is finalized can be claimed the year the payment is made.

Travel expenses, meals, lodging, court costs, attorney fees, and other expenses directly related to the purpose of adoption are included as applicable to the adoption tax credit. The credit is scalable with more children. It doubles with two children, triples with three, etc. The Adoption Tax Credit is a credit, not a deduction. That means that if you spend $14,000 on adoption and are assessed $15,000 in federal tax, you would end up owing $1,000 in tax. This is different from a reduction in taxable income, such as mortgage deductions.

Some states have additional adoption tax benefits that apply in conjunction with the federal Adoption Tax Credit. Wisconsin, for example, provides for an additional $5,000 tax deduction (not a credit) for parents of newly adopted children.

For those looking for more information, the Congressional Research Service recently published a report on adoption tax benefits. Adoptions of Wisconsin does not provide tax advice or guidance. Please contact your tax advisor for information on the Adoption Tax Credit.

How To Pay For Adoption

Congratulations! You’ve been matched. Odds are that, as waiting adoptive parents, you're looking for ways to pay for adoption, or you have already paid or incurred agency fees. Now you will have more expenses, which may include birth parent expenses, agency fees, attorney fees and travel expenses. Even though this is the happiest and most significant event in your life, adoptive parents have the same responsibility as other parents to be good stewards of their families’ finances.

Many adoptive parents spend years saving for their dream. Others use their tax refunds or borrow from their loved ones. Earlier this tax season, we reminded everyone about the Adoption Tax Credit, a dollar for dollar federal credit worth up to $13,570 for 2017. [link]

Some adoptive parents have organized bake sales, community potlucks, garage sales, and started fundraisers in their communities through platforms such as GoFundMe which can be easily shared through social media. If you’re feeling extra creative, you could sell handmade items or design t-shirts to sell that also double as advertisement for your adoption fundraiser!

In addition, Adoption of Wisconsin’s owner, Attorney Lynn Bodi, recently shared some other resources with us.

Lynn is proud to be a 20-year Fellow of the Academy of Adoption and Assisted Reproduction Attorneys (AAAA). In honor of its 25th anniversary, the AAAA created the Family Formation Charitable Trust to help build families through adoption and assisted reproductive technology. More information and applications for grants can be found at: http://www.adoptionattorneys.org/aaaa/charitable-trust.

Adoption Taxpayer Identification Number (ATIN)

If you are in the process of adopting a child, you may need to consider applying for an Adoption Taxpayer Identification Number, or ATIN. This is especially important at tax time. According to the Internal Revenue Service website:

“You should apply for an ATIN only if you are in the process of adopting a child and you meet all of the following qualifications:

• The child is legally placed in your home for legal adoption by an authorized placement agency.

• The adoption is a domestic adoption OR the adoption is a foreign adoption and the child/children have a Permanent Resident Alien Card or Certificate of Citizenship.

• You cannot obtain the child's existing SSN even though you have made a reasonable attempt to obtain it from the birth parents, the placement agency, and other persons.

• You cannot obtain an SSN for the child from the SSA for any reason. (For example, the adoption is not final).

• You are eligible to claim the child as a dependent on your tax return.”

The IRS website has even more information available at the ATIN Questions and Answers page: https://www.irs.gov/individuals/adoption-taxpayer-identification-number.

Please consult with your tax advisor.  Adoptions of Wisconsin loves to help with adoptions, but we are not tax experts and will not provide tax advice. Our attorney, Lynn Bodi, also does not provide tax advice, even though she really enjoyed her tax classes in law school, but that was a long time ago.

Funding Your Adoption: Baby K Bake Sale

Funding any long-term endeavor, whether it be completing your education, buying a home or pursuing adoption, often requires more money than can seem feasible. A common hesitation for prospective adoptive parents is the big dollar amount that is looming over the decision to pursue adoption. This leaves many families feeling frustrated or even giving up on their dreams of growing their family through adoption. Although there are hurdles to overcome, there are ways to fund your adoption journey outside of your income alone.

Kelly and Neil, a waiting family on AOW’s inactive list, have been getting creative with their funding ideas for “Baby K’s” adoption. Not only have they been doing extensive research about possible grants and fundraising options, but they have gotten creative with simple ideas that they could do. Kelly and Neil then reached out to family members to let them know about their adoption plan, and their support has been overwhelming! Kelly’s extended family in Tennessee immediately thought of having a bake sale to support Baby K. Take a look at some photos of the busy work days and the finished product. The story below is written in Kelly’s own words about her experience with funding her adoption journey.

Kelly and Neil with family busy decorating deserts

“Adoption has always been in our hearts. However, the expense of adoption was something that seemed overwhelming. I am a planner, so I had a plan for how we would make our family of four, which included adopting a child in our late thirties (when my husband had completed graduate school, which would give us two incomes, and life would be perfect). However, as we grew older and began to experience fertility problems I began to worry we might never be able to grow our family or we might have to wait another 10 years. It was then I decided we could do anything we put our minds to and we could find a way to pay for adoption and grow our family. I realized then that there was probably never going to be a time in the near future where we had an extra $30,000 laying around. Like any large, overly ambitious project I have talked my husband into tackling (such as quitting my full-time job and going back to graduate school, while remodeling our 100-year old home) I could put together a plan to grow our family through adoption. After meeting with a few agencies and discussing their practices, we decided that Adoptions of Wisconsin (AOW) was the best fit for us. While the adoption fees were still a bit overwhelming they were broken down and spread out over a period of time, which seemed more manageable. I then put together a spreadsheet, including a budget and savings plan to our adoption fund.

As we started the adoption fund I began to look to see how others had funded adoption. I began reading blogs and looking on Pinterest for adoption grants and fundraising ideas. I started to share with family our plan of adopting and our potential plans for fundraising. Once on the inactive list we made an adoption announcement via email and social media to let our family and friends know of our upcoming plans! We were overwhelmed with the love and support we received from our family and friends. Not only were they so excited for us, but they wanted to know how they could help make our dream come true. We started a crowdfund with 501c3, where people could make a tax-deductible donation that could be directly applied to our adoption fees. We also had family and friends offering to host garage sales and bake sales to raise funds for Baby K. My aunt and cousin that live in Tennessee were avid bakers and had done many bake sale fundraisers. They began to make themed treats weekly, post pictures on social media and sell them at work. Friends and family in Wisconsin instantly started drooling over these baked goods and asking if they would ship. Because the baked goods were not commercial, shipping was not an option. However, my creative cousin came up with an idea to bring the Baby K Bake Sale to Wisconsin for one weekend. We’re not sure they knew what they were getting themselves into. Neil created a “pre-order” form and my cousin created Disney-themed cupcake samplers and a variety of cookie options. Soon after the order form went live, we had nearly 500 orders for cupcakes and cookies. One week later we had over 950 cupcake orders and over 350 cookie orders. My aunt and cousin packed up their truck and brought the Baby K Bake Sale to Wisconsin. They had pre-made and frozen many of the cupcakes, and then set up “shop” at her other cousin’s home for the weekend with banquet tables full of cupcakes to be individually decorated. My cousin spent three days decorating cupcakes on nearly no sleep. At the end of the weekend the task was complete! We spent two days afterward hand delivering cupcakes and cookies to family and friends throughout Southern Wisconsin and Northern Illinois. The “Baby K Bake Sale- Wisconsin Edition” ended up raising a net of over $1,000. As my cousin and aunt packed up the truck to head back to Tennessee, they began discussing the next “Baby K Bake Sale- Wisconsin Edition” and winter-themed cupcakes and cookies!”

A big thank you to Kelly and Neil for taking the time to write this blog post about funding your adoption. Also, we are excited to see where your adoption journey goes and can’t wait to see the winter-themed bake sale!

Disney-themed cupcakes

Disney-themed cupcakes

Some of the finished product!

The cupcakes look almost too pretty to eat!