Many taxpayers who adopted children from 2005 to 2011 qualified for a substantial tax credit when they filed tax returns for those years – credits as high as $13,360 per adopted child. Many who qualify still do not know the credit exists – a credit so large it can literally be life changing, especially for one group of taxpayers: grandparents who adopted their grandchildren through the foster care system during these years. Those who qualify, however, need to act soon or the credit will disappear forever.
Grandparents as Parents: According to AARP, more than 2.5 million U.S. children are currently being raised by their grandparents. Many have legally adopted their grandchildren and are not aware of the fact that their grandchildren had been certified by the state as children with “special needs” (a phrase which has nothing to do with any form of physical, emotional or learning disability). A large number are raising these children on fixed incomes: incomes so low they did not even have to file tax returns for these years.
In today’s column I will discuss the Adoption Tax Credit and children that meet the IRS definition of “special needs.” I will also discuss the unexpected financial windfall adopting these children created for these grandparents and, finally, why time is running out on claiming the credit.
The Adoption Credit reimburses adoptive parents of eligible children for qualified adoption expenses up to specified limits. For those adopting “special needs” children, however, the full credit amount is available for each child regardless of any expenses paid by the adoptive parents.
Prior to 2010, the Adoption Credit was “nonrefundable” – meaning it would reduce tax liability but would not generate a refund. Although any unused credit could be carried forward, it was lost if not used within five years. Because the credit was not refundable, many adoptive parents saw little benefit and did not claim the credit or carry it forward.
The Changes: For 2010 and 2011 ONLY, the Adoption Tax Credit was made refundable by the Affordable Care Act. This means that adoptive parents can receive the credit even if they owe no income tax. This refund-ability also applies to any credit carried over to 2010 from any of the previous five tax years. The amount of the credit was $10,630 per adoptive child in 2005, an amount that increased each year to reach $13,360 for 2011.
The Adoption Credit and “Special Needs” Children: To qualify for the credit/exclusion, the adoptive child must be an “Eligible Child” or a “Special Needs Child.” An “eligible child” is either under the age of 18 or a person physically or mentally unable to take care of his or herself. A “special needs child,” is defined as an eligible child who meets three additional criteria: (1) The Child is a citizen or a resident of the United States or U.S. possession, (2) A state agency must determine that the child should not or cannot be returned to their parent’s home, and (3) The state must also determine that a specific factor (such as the child’s age, ethnic background, medical condition or handicap) makes adoption unlikely without assistance. In my experience, this applies to most children adopted through state foster care. If your child qualifies as special needs it should be clearly stated in the Adoption Agreement received from the state.
Window closing to claim credit: If the Adoption Credit was overlooked on an original return the only way to claim it is to amend the adoption-year’s return and all years required to carry the credit forward to 2010. Since the adoption credit can be carried forward five years, adoptions of special needs children from 2005 and forward can still qualify for refunds in 2010.
Unfortunately, however, the window of time is closing to claim the Adoption Credit, especially for those who adopted from 2005 to 2010. Due to the statute of limitations, taxpayers generally only have three years from a return’s due date to claim a refund. This means that the ability for most to carry forward and claim the Adoption Credit on 2010’s income tax return will expire April 15, 2014.
In today’s column, I have discussed a potential financial windfall for those adopting “special needs” children from 2005 to 2011. I have not discussed many of the credit’s complexities that may impact your return. As always, do not rely on this information as a basis to make any financial decisions. Feel free to contact our office to consult with a tax professional.
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