Are you planning on claiming the Adoption Tax Credit when you file your taxes this year? If so, this is the podcast for you! We talk with two of the top experts in the US on the Adoption Tax Credit: Becky Wilmoth, an Enrolled Agent and Adoption Tax Credit Specialist with Bill’s Tax Service, and Josh Kroll, the Adoption Subsidy Resource Center coordinator at the North American Council on Adoptable Children (NACAC).
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Dawn Davenport 0:00
Welcome everyone to Creating a Family talk about adoption and foster care. I'm Dawn Davenport, the host of this show as well as the director of the nonprofit creating a family.org. Today is our annual adoption tax credit show. So this one will be the adoption tax credit for 2022 taxes. As in past years, I am so pleased to welcome back our two experts and these guys really are the experts when it comes to the adoption tax credit. They are Becky Wilmoth. She is an enrolled agent and Adoption Tax Credit Specialist with Bills Tax Service. And thank you so much, Becky, for being back with us. We also have Josh Kroll. He is the Adoption Subsidy Resource Center Coordinator at the North American Council on Adoptable Children. And Josh, welcome back again. I feel like the gang is here. Thank you. Thank you. All right. So we're gonna jump right in. I do think that it probably helps us we actually start with the amount of the because the credit changes every year based on cost of living. I think so. Josh, what is the adoption tax credit for adoptions being claimed on the 2022? Federal taxes? The maximum
Unknown Speaker 1:16
amount is 14,890 for adoption, when you're claiming the adoption tax credit in 2020.
Dawn Davenport 1:24
Okay, and so, am I correct that it is adjusted upwards based on cost of living is that what it adjusts to?
Unknown Speaker 1:32
It is in In fact, for 2023? Because you may have some people who are in process, the amount will go up over $1,000, it will be 15,950 for 2023.
Dawn Davenport 1:46
Gotcha. But for this year, we're it's 14,008 90. Correct. Gotcha. Okay. So, Becky, let's talk about the difference what what is a tax credit? And how does that how does that play out on your taxes?
Unknown Speaker 2:04
A tax credit, the difference between a tax credit and a tax deduction? A tax deduction, lowers your taxable income, a tax credit actually helps cover your federal tax liability. That is what the IRS says that you would owe them. depending on you know what the total amount of your taxable income is. So the difference between your tax liability and your withholding is what you get as a refund or owe every year. So basically, what the what the adoption tax credit and a tax credit covers is before before the tax amount ever gets to your withholding, that tax credit covers that tax liability. So that's that's why it is such a great credit and is so important, because it covers that federal tax liability.
Dawn Davenport 3:05
So that means that you would get if you have if you have withholdings would that potentially mean you would get a larger refund check every year or you could have less? If you knew about it in advance, you could have less withheld out of your payment out of your paycheck. Is
Unknown Speaker 3:19
that how that would work? Yes, ma'am. Absolutely. All right.
Dawn Davenport 3:23
And we continue to get questions about refundability. And there was a brief in shining moment many years ago, when the tax credit was refundable. And I don't want to spend too much time because it's not refundable. Now, but I do want to, I do want to give us an opportunity. And Josh, I'll turn this question to you for how we could advocate for refundability. Again, it is not a refundable tax credit now, and it hasn't been for many years. But we continue to advocate for it. So could you give our listeners a where to go to help advocate for getting this to be refundable again?
Unknown Speaker 4:04
Sure. There has been bills introduced year after year to make it refundable with the new Congress coming in there will have to it'll have to start all over again. But the best place to go is Adoption Tax credit.org, NASDAQ as well as many other adoption groups are part of that website. And it's geared specifically towards advocating for to be refundable.
Dawn Davenport 4:29
Okay, thank you. Yeah. So please, everybody consider that because it would be really great if we would if we could get it refundable again. All right. So Becky, what happens if you don't have federal tax liability? Should you just give up on it? I mean, should you still apply for the credit, but you don't have any liability. So do you get anything from it?
Unknown Speaker 4:51
You should absolutely go ahead and take the adoption tax credit even if you have zero tax liability for For two reasons. Number one, everybody's tax situation can change from year to year. But not only that, but if it does become refundable again, you will have that credit carry forward sitting there waiting. So even if say this year, you have zero tax liability and someone tells you Oh, well, you don't need to take it. There's no use and you take it, go somewhere else, because you absolutely want to take it because it's always easier to carry it forward. Because you can carry it forward for up to five years, it is much easier to carry forward than it is to go back and amend to take the adoption tax credit. So absolutely, even if you have zero tax liability, go ahead and take it and then just carry it forward.
Dawn Davenport 5:49
Okay, excellent. So Josh, what type of adoptions are included or excluded?
Unknown Speaker 5:55
The ones that are excluded really are adopting your spouse's child. So step parent adoption. So adopting from foster care, private domestic, whether through an agency or an attorney, or adopting internationally are all eligible? Okay. But I know you're about to say, What about embryo adoptions? And I'm pretty sure the answer is still no on that one. Yeah,
Dawn Davenport 6:18
I think it is still no one that Yeah. All right. What about same sex partners doing a second parent adoption?
Unknown Speaker 6:27
It's, it all depends on being married. So if they're married, and it's the same for opposite sex couples, if they're married, it's a step parent adoption. If they're not married, then it's a second parent adoption and the expenses would be allowable.
Dawn Davenport 6:41
Yeah, it's kind of ironic, isn't it? Yeah. This is a case where not being married actually benefits your financial. Yeah. Yeah.
Unknown Speaker 6:50
And then technically, I don't think anybody would want this headache. But technically, if you married in the same year, but it was after the adoption and the expenses, it should be legal, but it will probably raise flags with the IRS because, you know, just because the same year they're only looking at, you know, the IRS looks at 365 Day Chuck.
Dawn Davenport 7:16
So they're not gonna Yeah, they're not good at nuance. We have received this question in the past, not this year. But with surrogacy be covered in the answer is no surrogacy is not covered. All right. So can you get the credit for each adoption you complete, even if it's completed in the same year? So let's say either you're adopting siblings or you just do two separate adoptions? Becky?
Unknown Speaker 7:41
Yes, ma'am. Absolutely. And and I've seen that happen. Of course, there's there's always a lot of sibling groups. But I have also seen families finalize separate adoptions in the same year. And absolutely. Each each successful adoption qualifies
Dawn Davenport 7:57
for an additional credit, right,
Unknown Speaker 7:59
go ahead. And I would just add to this, because there have been confusions, not everybody reads the instructions. I know Becky does. But not all tax repairs do if you have more than four kids adopted any year or even if they're strung out over multiple years with a carry forward, you fill out additional 8830 nine's so that you can play more than three children because there's only spots on that form for three children.
Dawn Davenport 8:24
And that is the form he just ate. 39 is a form number. Yes. Yeah.
Unknown Speaker 8:28
It's very correct. Yeah. All
Dawn Davenport 8:31
right. So Josh, what is a qualified adoption expense for purposes of the adoption tax credit? As for taxes in 2022? That's a general question. I know.
Unknown Speaker 8:43
It's generally going to be expenses related to the process of adoption, the big ones are going to be, you know, adoption fees, where you're paying an attorney or an agency, court costs, but also can include travel. If you're, you know, adopting a child internationally, or, or someplace else into the travel isn't just flights, but also lodging while you're there, food while you're there. And for folks who are adopting maybe through the foster care system, it can also be like pre placement visits, you know, sometimes they want you to visit the child and they might not be near you, before you actually go and adopt the child. And I think that covers, you know, most of it, background checks, home study cost, you know, I think that covers most of it, but Becky will know better. Usually she gets this question.
Dawn Davenport 9:40
You're up? Okay.
Unknown Speaker 9:42
Well, he's all of the above that Josh said. But really what the IRS says is anything directly necessary related to the adoption. And as far as travel, there is no mileage for adoption, but you can take Gas receipts. And, and and I always advise clients, you know, start with the big seat receipts first, you know, because most of the time, you're you're going to have more than enough. But let's start with the the big receipts, you know, before we worry about all the little things, let's go for the big ones first. So yes, you know any any, any expense necessary and directly related to the adoption of that eligible child.
Dawn Davenport 10:31
And every year we get questions about what about birth mother or birth parent expenses. But just as the way of background differs, what is allowed to be wasn't allowed to be paid, differs significantly by state it is a state law issue. But I think that what we it's it's something it should be accepting of a moot question because it is not 100% clear how the IRS is going to be treated, but almost always you're going to have other expenses that will make up the the amount of the credit. So it seems to me it's something of a moot point. Becky, we do agree, start with the big ones, and you're going to use up, you know, 19,890 will not go that far.
Unknown Speaker 11:15
Right. And and the thing is the reason that birthmother expenses are not allowed expenses is because it violates federal law. And some states Some states allow the birthmother expenses. But as far as federal law, the reason it violates federal law is because you cannot deduct living and personal expenses, according to the IRS. So you you, you know those birthmother expenses, like you said, you know, almost become a moot point, because by the time you had attorneys fees, court costs, you know, all of these other expenses, you know, so that's why I just tell clients, you know, when you when you pay, you know that that agency fee, you know, just just get an itemized detailed list, and that that solves the whole thing.
Dawn Davenport 12:09
Perfect. And let me pause the actual correct term for these expenses are expected parent expenses are expected mother expenses. In the tech circles, we still think of it, we still hear it referred to as birth mother expenses. And these are just the expenses that if your state allows it, some do some do not to help and expect it mom, it could be clothing, it could be housing, it could be transportation, during her pregnancy prior to the place prior to the adoption. Let me pause here for a moment to tell you about a free educational resource. Thanks to our partners, the jockey being Family Foundation, we have a library of free online courses for you, our listeners, you can find them at Bitly slash JBf support, that's bi T dot L y slash JBf. Support. And you can see there are 12 of them up there. They are fantastic. If you need a certificate of completion, you can get it you don't have to get it. But you can get it if you need it. They're there. They're great for foster parents, adoptive parents or kinship parents. All right, so excellent. Now, the adoption tax credit works differently depending on the type of adoption. So we've got foster care adoption, we've got domestic adoption, we've got international adoption. So let's talk let's break those down. Josh, I'll start with you. Domestic private infant adoption or domestic private adoption. In the United States. How does the adoption tax credit work for those adoptions?
Unknown Speaker 13:43
For those adoptions, typically, they won't be determined as special needs, which we'll go into more detail on the foster care adoption, although there are some cases where they can be. So they're going to be documenting expenses. The big difference between the private domestic and international which also document expenses to be able to claim the credit is timing. And the timing for private domestic adoptions is and it doesn't actually have to be infinite. I mean, not that there are many that are not infinite, but there are some is the timing issue. And if you're doing this and it's taking multiple years, you can claim the credit for expenses paid the year after you pay them if the adoptions not finalized. So if I started my process last year, or two years ago in 2021, and I paid $3,000 in home study, payments to an agency and whether I've been matched with an expectant mother or not, at this point, those 3000 that I paid in qualified adoption expenses in 2021. I can take on my 2022 taxes, even if there isn't a child I'd identified.
Dawn Davenport 15:01
Now go ahead and contrast that to international that might be a better way to explain it. So with international,
Unknown Speaker 15:06
I'm still documenting expenses. But the timing issue is it's got to be finalized, you have some flexibility in when it's considered finalized. If it's finalized in country, the country you're adopting from, you can always claim it as that's the year of finality. But if you're in a state that requires you to re adopt in the US, and Becky might know a little more about these, but you can also do it later. And that can come into play with income limits for families trying to maximize the benefit, but you can't the international adoptions, you can't claim them until they're finalized. And it was really sad when Russia closed down suddenly, all those years ago, there were families in 3040 50,000, that never could recoup those costs that they'd already paid out, because they were never able to finalize their adoption.
Dawn Davenport 16:00
Yeah, Becky, what about Josh mentioned were with a state requires re adoption and international adoption, be re they go through the adoption process of re adoption, in the United States in that state. But what about it when parents there are many times where parents will choose if only to get a US birth certificate, which will make things easier? Where they will choose to readopt? Can the expenses for re adoption if it's not required by the state? Can we use that as our timing?
Unknown Speaker 16:31
Yes, you can you have up to two years, in order to for an international adoption, when you are either by choice or by state mandatory laws, that you are required to readopt you have up to two years. So the the perk of that is number one, you know, the because of the adoption, tax credit increases every year, and like from 22 to 23. It jumped significantly. So if you know, if you have $30,000 in expenses, and you know, you're going either by choice or by by the state law, you're going to readopt. I mean, I guess in my tax brain, it's kind of a no brainer, you know, because you know, you have up to two years. And when you're talking such a big significant difference from 2021 was 14,440. And 2023 is 15,950. That's, that's that's plenty incentive, you know, to go ahead and use that two year time slot up that you have in order to readopt.
Dawn Davenport 17:47
And we will talk about this in a minute. But there are income restrictions too. And in case you have an income fluctuation that that might make a difference. That's another reason to consider if you have the option.
Unknown Speaker 17:58
I will say one thing, though, if you did do it in the earlier year, and you did readopt. Once you finalize the adoption, you could still get that extra if the expenses were paid in that that later year
Dawn Davenport 18:12
the expenses only the expenses you have incurred. Yeah. Every adoption expenses, you can claim that okay, got it. Interesting. Okay. All right. So let's talk about kinship adoptions. We are certainly seeing, I don't know if we're seeing more of those. We're certainly encouraging families and this is primarily children in foster care, or not, not in foster care, but we're kin grandparents, aunts, uncles, adopt a child, if it's your grandchild that you're adopting, or if it's your niece, you're adopting. Josh, are you eligible for the adoption tax credit?
Unknown Speaker 18:47
Yep. The only limitation is it's not your spouse's child.
Dawn Davenport 18:51
Gotcha. And in that to get whether or not that whether or not your grandchild was ever in foster care, or you just stepped in, because you saw that there was a need, it doesn't matter at all. You're still eligible for the federal adoption tax credit. Yeah. Okay. Excellent. All right. Now, let's talk quickly about not quickly because this is not a quick topic. Becky, let's talk about foster care adoption. We've talked about domestic infant and international and, and the timing and you're having to track your expenses. This foster care differ from this.
Unknown Speaker 19:24
It does on a foster care adoption. Of course, it has to be final, just as it is on International, the adoption must be final. And, you know, with a child in the foster care system, if they have they qualify for that subsidy agreement. They qualify for the full amount of the adoption tax credit with no expenses, and, you know, subsidy agreements, there's there's different types of subsidy agreements, some some is the monthly stipend, some is is You know, just Medicaid, or the, you know, one time reimbursement, if they have that subsidy agreement, you know, for either of those, one of those three criteria, then they qualify for that full amount of that credit, with no expenses. And, you know, there's a lot of people that are told, Well, I didn't have any expenses. So I don't qualify, that is not true at all, in the foster care system, if they have that subsidy agreement, and, you know, 90 95% of the kids in foster care system, you know, have that subsidy agreement. You know, some states are what I call more special needs friendly than others, because each state has a different criteria as to what qualifies as special needs. And the biggest issue with that Dawn is what you and I consider special needs. And what the IRS considers special needs is two completely different things. What the IRS considers special needs, is hard to place without some type of assistance agreement. That's what the IRS considers special needs. When in our mind, when we think special needs it's, you know, physical, some some form of disability or, or, you know, possible implications down the road of some type of exposure the child has had. But the most important thing to remember is if they have one of those criteria for special needs, without subsidy agreement, they qualify for the full amount with no expenses.
Unknown Speaker 21:47
I would just say, because I deal with adoption subsidy. That's my actually the main part of my job. It what Becky said it's 100%. Correct. But really it comes down to do you get adoption assistance agreement, as Becky said, that provides one of those three criteria, then it's special needs for the purpose of the IRS. And in in this might be getting a little too much in the weeds, but anybody that's doing their own taxes, you don't mark the disabled, you mark the special needs on your taxes. The disabled is related to something else about adopting someone who's over 18.
Dawn Davenport 22:22
That is correct. Go through the three criteria again, just to make
Unknown Speaker 22:26
up the monthly payment, Medicaid, or the reimbursement of non recurring adoption expenses.
Dawn Davenport 22:33
All right, Josh, what about the situation where and this this comes up not infrequently with infant adoption, or young, very young children adoption? There is no the child is adopted, there is no identified special need at that time. However, the parents feel that are concerned that there may be because this is an infant at this point. We don't know the child may have been exposed prenatally to alcohol or drugs. We're not sure. So the parents asked for it's called different things. And you would you are the expert on this. But $0 amounts subsidy agreements, is one thing there probably go by other. Can you talk about how that would be handled? Because the parents, the social service agency is saying there is no the child is perfectly healthy, there is no not hard to place, but you as a parent say. But in the future, we don't know what's going to be coming down the pike.
Unknown Speaker 23:27
Right. So the states that offer that it's not all states, but it's probably a majority of states, they call it future needs high risk, dormant deferred. Those are some of the common terms. Those as long as they provide one of the categories, you only see it that I know that has an agreement like that, but does not provide any of those three things as GA, but as long as it has one of those things. And Medicaid, it's the most common, the non recurring is the other one, those agreements typically come with zero monthly payment. Those are good enough for the IRS. And the reason states do that is also to make their life easier. And actually, it's like a backstop. if problems arise later, it's a much easier process to get those families support. So it's, it's actually it's a good thing that the states do do that. And then it has the added benefit of them qualifying them for the adoption tax credit or special needs.
Dawn Davenport 24:22
And almost always if you're getting a whatever it's called deferred future needs subsidy agreement, zero amount $0 amount, you're going to have Medicaid. And so Medicaid is one of the criteria. So this is a moot point again, are almost always All right. So Becky, many fact I would not many, I would say all of the children being adopted or the vast majority, let's say being adopted internationally, do have some form of special needs. international adoption is basically a special needs adoption program now. So what about those kids they have special needs often significant get special needs?
Unknown Speaker 25:01
Well, and once again, that is where the difference between what the IRS considers special needs. And what we consider special needs is two different things. So for international adoption, it is going to be for expenses. Just simply because, yes, you know, there are a lot of international adoptions, that those children have disabilities or medical issues, you know, whether they're realized now or later, but for, you know, for international adoption, it is going to be for the expenses.
Dawn Davenport 25:39
Gotcha. Okay, we get that question every year.
Unknown Speaker 25:43
And then the reality is, usually, they're still going to be over the full amount. So it's not going to make a difference, because all this special needs does is let you top off at the amount. And but it's actually Congress passes the law, and that for special needs, they do have to be a US citizen or resident at the time of adoption.
Dawn Davenport 26:02
Yeah. And that's meant that the point you made is that sometimes people will say, well, that's unfair. Well, fairness in the eyes of IRS, you know, it's not up to URI to judge, but also the reality is international adoptions are going to be well over the tax credit limit. So
Unknown Speaker 26:21
remember, it's Congress actually set the law? Yeah. Iris administer. That's
Dawn Davenport 26:25
true. Good point. Okay. So that yes, okay. Okay, I would bring Congress. There you go. Okay. IRS, please. I'm not I don't I do not take the IRS. That would not be a good idea. All right. So Becky, can you reclaim your expenses for an attempted adoption that did not result in a placement or resulted in a placement, but the birth parents changed their mind,
Unknown Speaker 26:50
for the only type of adoption that you can recoup failed expenses is for private domestic. And so it is the same way on a private domestic adoption, as it is for a failed adoption. You cannot take those expenses, that tax year, you have to wait until the following tax year. So let's say for an example, you know, I paid in adoption expenses, and 2021, and the the adoption fell through. And so I could not take those on my 2021 tax return, but I can take them on my 2022 tax return that we are getting ready to do. And so what happens is, is when you claim that adoption tax credit for the failed attempt, what you receive in adoption, tax credit for that failed attempt will come off of the next successful adoption that you have. So to keep the numbers clean, let's say for an example, you had $5,000 in failed adoption expenses that you claim that you paid in 21. But you cannot claim them until your 2022 tax return. So you claim those $5,000 in a failed adoption. So then, let's say the next following year, you have a successful adoption. So you take that $5,000 off of that successful adoption amount, which will be, you know, the 15,950. So you would only actually qualify for 10,950. Because you have already received 5000 from the previous failed adoption.
Dawn Davenport 28:52
Got it. That makes sense. But let me just be clear that the adoption tax credit that people are filing for for 2022 is the 14,890 not the 15,000. Correct? Yeah, I just gave that number. I don't want to get people's hopes ups. We are where we are for we're thankful for the 14,000. We'll be happier next year. But that's okay. We're correctly right. Yeah. Where we are now. Did you know that most people find out about podcast from their friends. So what we need for you to do is tell your friends about the creating a family.org podcast that helps us reach more people with our mission of support and education. So please spread the word. Let your friends and your family let the guy sitting next to you on the subway or the barista at your local coffee place. Let them all know about the creating a family.org podcast. All right, so I've talked about income limits. So let me go back to that now Josh can regardless of how much money you You make Are you eligible for the adoption tax credit? Or are there income limits.
Unknown Speaker 30:06
So to when you claim the credit, it asks it calculates your modified adjusted gross income. And you it does start to phase out in 2020, to $223,411. Over the next 40,000 is always a 40,000 range. So up to 26 263,410, you're gonna get a partial, if your income is above 263,410, you're going to not get anything because you're over income. So that this credit, we're when we're talking about Magi and what I was talking about timing with international and why people might want to pick one year or the other, it's this credit is only apply or this sorry, this income test is only applied in the year you're claiming the credit, it's not applied, if you have carry forward now at this income level, if you're just under you know, if you're about 200,000, and you just have one kid, you're going to use it all up in one year. But if you adopted like a sibling group, and you're near this level, you might have some carry forward. And the income limit does not matter for carry forward just for claiming the credit.
Dawn Davenport 31:25
Okay, got it. So is mentioned carrier with back, we've mentioned it a couple of times so far. When does it come up? I mean, what we've said five years, you have five years with which to claim the credit, give me an example, Josh, of how that would, how somebody wouldn't claim it and why they would need to carry it over.
Unknown Speaker 31:44
So let's say I adopt one kid with adoption assistance, special needs in 2020 to go file my taxes, I claim 14,890, my tax liability working child welfare, so you know, I don't make a ton of money. So I use little, say $6,000 in adoption credit, when I go and do my taxes, that increases my refund, I like that. That means I didn't use 8890. That's the math. And that's going to carry forward like Thanksgiving leftovers that's going to carry forward to my 2023 taxes that I'm going to file in early 2024. And I keep doing that until I use it up or a total of six years have passed. It's five additional years. So the year you claim the credit plus five additional years. And if we're if your private domestic, and you're claiming the credit over the years, because it's taking a while to adopt each year, you claim that credit that year has five additional years, when I play more than next year, that credit has five additional years. And the IRS makes you use the oldest credit first. I know it's getting a little in the weeds. But it does matter to some families.
Dawn Davenport 32:57
Oh yeah. For the actual amount. And the am I oversimplifying it and saying where this really comes in, primarily is if you for families who don't have much federal tax liability for whatever reason, income is low, or maybe they've got they've got the way they've got their money invested for whatever reason, they don't have a large federal tax liability, or they're adopting a larger sibling group. Right. So they get Yeah, so they
Unknown Speaker 33:24
got four kids next year. I'm looking at almost 64,000. Right. Yeah. A little harder to use and wonder Yes, good. Yeah,
Dawn Davenport 33:31
very good. Absolutely. All right. This up, I'm going to this is a question we got. And so I'm just going to read it. And Becky, I'll direct it to you. Are you able to amend previous year tax returns to claim the adoption tax credit? We originally misunderstood how it all worked. So we miss claiming the tax credit in 2019. Is the adoption tax credit, something you could amend for? And if so, how many years? Can you go back? And how do you amend?
Unknown Speaker 33:59
Absolutely. One thing to remember, especially when you're amending tax returns, you can only amend three years for a refund. However, since the adoption tax credit is a five year carry forward after the initial year of claiming, you can go back five years, carry those first two years forward. You're not going to get anything for him. Okay, so all the only reason you are amending is to carry those forward. However, when you get to that year three, from there forward, you can claim, you know, refund for that. So you can absolutely go back and amend for the adoption tax credit. And one thing that I want to clarify that what we were just talking about is you know, there's only three things that the adoption tax credit does not cover. It doesn't cover self employment tax. Since it's non refundable, it doesn't cover first time homebuyer payback. And it does not cover the 10% penalty for early distribution of retirement. Now there is a cube owed is what we call it now, due to the secure act, and I think we'll talk about that a little bit. But I just wanted to mention, you know, when we're talking about federal tax liability, there's there's federal tax liability and self employment tax are two different things. And that may be the reason that someone is not able to use the adoption tax credit, or to the to the maximum amount that they could have, if it was refundable. But since it's non refundable, it doesn't cover that self employment tax. So I just wanted to clarify that when we're talking about federal tax liability, but yes, absolutely. If if you, you know, or if you didn't know about the adoption tax credit, or if someone told you, you didn't qualify, and you actually do qualify, absolutely. Go back and amend your tax returns. And the one of the great things now is you can amend electronically. You could not do that for years, it had to go in paper. And we all know what it's been like the last two or three years is has been an absolute nightmare for us. As far as, you know, paperwork with the with stuff going on, and everybody shut down because of COVID. And it's just, it's created a firestorm. But since the you know, the adoption tax credit can can be amended for and you can amend electronically. Absolutely. Please go back and amend your returns.
Unknown Speaker 36:50
Can you amend electronically, the 2019 returns? Or is that only 2020? Or 2021? Is that 18? Yes, I didn't, you can too. Okay, good. But And just to clarify right now, 19 is still an open year, because the those taxes were due April 15 2020. And the three years is April 15 2023, which we have not hit yet. And if you do an extension, it's to that whatever the day, you filed up to October 15 of 2023. If you filed early you have to the due date. So even if you filed early you filed in, you know, February 1 2020 for your 2019 taxes, you still have till April 15 of 2023 to amend that and get that in to be able to get the refund for that year.
Dawn Davenport 37:42
Okay, excellent. Which one of you wants to explain the secure act and how it applies to birth or adoption? Okay. Oh, this is in our family we call it nose goes where somebody touches their nobody, not me. Okay, so All right, Becky, the gauntlet has been handed to
Unknown Speaker 38:00
you? Well, there have been there have been a lot of issues with this, first
Dawn Davenport 38:04
of all, tell us what the secure act is. Well,
Unknown Speaker 38:06
what it what the secure Act has done. As far as adoption and the child tax credit, the biggest issue that we have dealt with is because of social security numbers, it has become a firestorm. The main reason is, is with all of the stimuluses and with with the all of the changes in the Child Tax Credit, that social security number has become the hot topic. So that's why if you you know a lot of people want to take an A 10 Because with the stimulus is a lot of things changed with ATMs and social security numbers. If you have to file an extension, this is this is going to what I'm going to say about the secure act, if you are say you've been waiting for a social security number,
Dawn Davenport 39:01
this is for your child. Correct? Okay, so it's the the issue is, you don't have a social security number for the child and you're trying to get the credit. Correct.
Unknown Speaker 39:11
So what you need to do is you need to file an extension, okay. And you need to wait on that social security number. Because now because of the secure Act, in order to claim a lot of these credits, stimulus, Child Tax Credit, all of these you have to have the social security number by the due date of the return. So let's say you don't let's say the adoption was final in 2022. Well, it comes time to do your 2022 tax return, and you still don't have it by April the 18th. Filing extension, because you need that social security number in order to claim those credits.
Dawn Davenport 39:53
Okay. All right. So that's the solution, file extension and hopefully, that with the expo attention that you will continue to file extensions until you get the sense of security number.
Unknown Speaker 40:04
And there's times that I've had to tell clients, you know, if they've had issues, you know, at one social security office, go to another one. And I know that sounds absolutely crazy. And it's the same way, when you're calling, you know, the IRS, because they've had so many retire, so many agents retire, that they are still training many new agents. So a lot of times, you may call three different times get three different answers. So I highly recommend that if you are having issues, because of all the tax law changes, because of the secure act, and you you, just be diligent. Be diligent, don't give up, file an extension if you need to.
Unknown Speaker 40:53
And I don't know if it's much help. But you know, social security numbers are a federal issue. So members of Congress, constituent services may be able to help if you're delays, they may not be able to. But, you know, that could be another route to try and help move things along. If they're stuck.
Dawn Davenport 41:13
Yes, that's a very good suggestion, and one that people might not think about, because at some point, timing is going to become of the essence. Okay.
Unknown Speaker 41:20
I've had clients get a hold of their congressman, for that reason, to help facilitate.
Dawn Davenport 41:27
Yeah, that's such a good point. All right, we are seeing an increase, thank goodness of employee adoption benefits. This is something that I know Dave, the Dave Thomas Foundation has been advocating for, and many of the of the adoption advocacy groups. So we're seeing an increase, we are seeing more employers provide adoption benefits. So how does this is to you, Josh, how does the adoption tax credit work in relation to the employee adoption benefits.
Unknown Speaker 42:04
So the employer benefits, basically, I'm Becky probably have to tighten some things up because I rarely get these questions. But it is an exclusion. So that is income that a family gets, it's going to show up on your W two, if they pay you a benefit. And you need to exclude that from your income in terms of its interaction, and it is on the same form the ADA 39. It's the part three, and it is the interaction with the adoption tax credit is when calculating qualified adoption expenses. So if I adopted in 2022, and my employer paid me, you know, gave me $5,000, for adoption expenses, I exclude 5000 of my income. And then I still need to come up it based on expenses that I paid, and I still need to come up with another 14,890 and expenses to claim the full amount of the adoption credit. So I'm looking at in that example, I'm looking at 19,980 in expenses that I need to justify if it's special needs, which is you get that adoption assistance that provides one of those three things a monthly stipend, the Medicaid or the reimbursement non recurring, and your employer has a IRS certified or whatever those IRS, you know, it meets the IRS requirements the congress set for an employer benefit if they have a benefit, whether you get money from it or not. If it's considered special needs, you can take an exclusion for the full amount also. Okay,
Unknown Speaker 43:43
I love that. Yeah, I think it's wonderful. I really do. I mean, who, number one who doesn't want to exclude $14,890 from your taxable income, just just saying, Yeah, but the the, the jewel of that is, you can, you know, you can claim the full amount of the credit and you can claim, the full amount of the exclusion on, you know, private or international, it just can't be for the same expenses. And for the special needs for foster care. You know, you can claim the credit for the 14 890 and exclude income from 14 890. And I always tell clients, especially if you are in the process of the adoption, go to your HR department, it's not going to hurt to ask them. It's it's not hard. It's really, really not even like Josh said, even if the employer doesn't give you anything, you can still as long as they have a qualified adoption benefit program. You can exclude that income and it's, it's not much paperwork. The biggest caveat of it is is they have to To offer that to all of their employees, and Dave Thomas Foundation has a great employer toolkit they do on their website, it's it's top notch. And so I tell clients just print that off, take that to your employer, and just say, Hey, can can we do this, get this going by the end of the year, because I know, you know, my adoptions going to be final next year. So this, I mean, this is a great employee benefit. That doesn't cost the employer anything, a lot of large, there are a lot of large employers that do offer either reimbursement or grants or you know, all things but they don't have to, in order to get the income exclusion, it doesn't cost the employer anything, all they have to the only requirement is is they have to offer it to all employees. It's, you know, box 12 code T on your W two. That's it. And that's that's quite a bit of money. You know, when, especially when, you know, families are crunching, crunching numbers and pinching pennies because of you know, inflation is high and every little bit helps, you know, and and, and I don't know, are we going to address Kubota? Here, or?
Dawn Davenport 46:18
Yeah, let's start right now. First, explain what it is. And then yes, okay.
Unknown Speaker 46:22
As I said earlier, one of the things that since it's the adoption tax credit is non refundable. It does not cover the 10% penalty for retirement early distribution. But because of the secure act Kubota is the acronym for its qualified birth or adoption, distribution, and qualified birth or adoption distribution from any eligible retirement plan, you can take up to $5,000 out of that retirement plan, without the 10% penalty if you're under 59 and a half. Now, that que Bode is per individual, not family, for each birth or adoption. So let's say my husband and I, you know, are adopting and we need, you know, a little boost to finish those expenses off. And so I could take $5,000 out of my qualified retirement plan, he could take $5,000 out of his qualified retirement plan. So that's $10,000 that we could take out of our retirement plan without the 10% penalty. If we're under 59 and a half. Now, you're gonna have to pay the tax on it. But if you qualify for the adoption tax credit, that adoption tax credit, will help cover the tax on that retirement distribution. So cute. Kubota is is one of the really good perks of the secure act.
Dawn Davenport 47:53
Okay. All right. Anything to add to that, Josh? No, absolutely. No. All right. Josh, let's talk about the how does it if you're adopting, are you eligible for the child tax credit? And how does the timing work for you as an adoptive parent,
Unknown Speaker 48:11
you're definitely eligible for the child tax credit if you meet the five criteria, which pretty much all adoptions unless you're adopting a teenager should qualify for. It's a relationship test age residency support and joint test, it shouldn't be a problem with for the people you're talking to. So the amount of the credit this year is 2000, which is what I did always, which is it had been since 2018, except for the little bump last year. And I think the biggest issue is what what Becky was talking about before with secure act is getting that social security number for, especially for the infant adoptions, or possibly for the international adoptions, too. But the interaction is depending on how much earned income the family has, that 2000, about 600 of it might stay and go against the tax liability before the adoption tax credit, with the other 1400 or potentially up to 1400 of it becoming a refundable counting as a payment. It's a little complicated. The forms take care of it, the software takes care of it. Anybody doing their own taxes, don't worry about all the math, their software will do it just fine. But they do interact a little bit. It does reduce typically how much adoption credit you can use in a year because some of the Child Tax Credits still goes first.
Unknown Speaker 49:33
Okay, only correction that I would like to make is the total amount has reverted back to the 20 2500 of it is non refundable and 1500 of it is refundable. That's the only difference.
Unknown Speaker 49:48
It's not 614 100. No. Oh, because that's what it used to be
Unknown Speaker 49:54
right but it's not this year. Oh it is going to the it's 515 100 And so yeah, yeah. And so and like, just like Josh said, you know how much of you know, since it was enhanced last year, it was, you know, it was either 3000 or 3600 depending on the child's age. And it was fully refundable. It is not fully refundable this year, the total has reverted back to 2500. However, it is non refundable. You know, you may you may use it or you may lose it just depending on your tax situation. But the 1500 of it is refundable
Dawn Davenport 50:35
back as long as you're talking about that. How does the advanced tax payments work? Yeah, so talk to us about how advanced tax payments would work with the adoption tax credit?
Unknown Speaker 50:47
Well, thankfully, I shouldn't say thankfully, it's it's no longer an issue for 2022. Okay, those advanced child tax credit payments, or for last year for 2021. There were a lot of people who received part of the child tax credit in advance last year. And so and then they the rest that they qualified for they received on their tax return. And this year, that is not the case, there is no advanced child tax credit payments for 2022. So it will strictly be reconciled all of it will be reconciled on your tax return.
Dawn Davenport 51:29
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Unknown Speaker 52:43
for submit, it's like that song for that phrase in a song absolutely nothing. Do not send in documentation to the IRS, there was only three years that needed to happen. Those are tax years 20 1011 and 12. Do not submit actually 2012. You didn't submit documentation just had a paper file. So 2010 and 11 are the only ones with documentation bullet folks should keep but just go through them real quick. From adoptions from foster care if you don't have expenses. There are some times you have expenses, adoption subsidy agreement, court decrees or judgment of adoption order or whatever the things from the court showing that you legally adopted for private domestic adoptions that are not considered special needs, there are a couple there can be special needs, you're going to do the court decree showing that you legally adopt the child. And then the expenses. The IRS was asking back when it was refundable for not only like receipts, but also proof of payment. Because like in theory, I could just create I work for neck on letterhead, I could create an invoice for things that you never sent me. So they wanted proof that people not only were billed this but paid that. So generally, you know, as Becky was saying earlier, look at the big things focus on those. But you know, any, any paperwork showing that you owe this money? And if you've got bank statements showing that you paid them this money, I would keep those. And then for international adoptions, same thing for expenses. And for for the documentation. There's a couple and Becky might know this off the top of her head. I don't remember them there. I think there's a couple of visas that work but the golden one that works everywhere, no matter how big or non a country is a translated document of the adoption in the foreign country. So if you've got to translate a copy of like you adopted in China, that that court decree that thing that happened in China saying that you adopted that child translated into English that would work
Dawn Davenport 54:45
Yes. Okay. Just keep a file, manila envelope, whatever you got with all of this information, date it and save it, because if you're audited, you will need it. Is that the set to just
Unknown Speaker 54:58
record? Go ahead?
Unknown Speaker 54:59
Yes, it is. This and and Josh said something very important that I want to reiterate, the IRS is not interested in what you were billed, they are interested in what you paid. And you know, of course, it doesn't happen near as much as it used to. But occasionally the IRS does request more documentation. So I tell everyone, you know, don't panic. That's why you keep everything in in that manila envelope marked IRS documentation, you know, show, it's the documentation was the big issue back in 10. And 11, you know, first thing I tell clients is, number one, don't ever send originals, send very good copies, make sure you put whoever is first on the tax return, put their social security number in red sharpie at the top of every page, when you send it to the IRS. Because sometimes tax returns go one direction documentation goes another direction. And so you, you want to keep your original copies of your sign and dated home study, your signed final judgment, adoption, you know, the original copy of all of your, whether it's credit card statements, bank statements, copies of checks, you want to keep the originals of those, you know, because you know, you, you will want to send good copies of those in if they request more documentation. And and of course, you know, always start with the big stuff. All right,
Dawn Davenport 56:32
and this is asking a question that goes back to something we've talked about before. And that's, we've talked about delays in getting the child's social security number. And we talked about it in relation to the secure Act. Now my question is, is there ever a time that you should consider using an adoption tax payer identification number and a 10, or an Individual Taxpayer Identification? Number itin? Josh all if you want to kick this one to Becky, Becky? Okay, Becky, this is why get paid the big bucks here.
Unknown Speaker 57:09
Family Feud pass replay?
Unknown Speaker 57:16
Well, here's here's with with the social security numbers and the 810s. Sometimes, yes, and a 10. You know, is isn't necessary, there are some limits to what you can use the Aten for. Number one, you cannot claim child tax credit with an A 10 You can only claim the $500 other dependent credit, which is non refundable, the $500 non refundable and the adoption tax credit. And so, you know
Dawn Davenport 57:46
what? I thought you just said you couldn't use the A 10 for the adoption tax credit. You can I misunderstood you, sorry,
Unknown Speaker 57:53
you can you can use the A 10 for the other dependent credit and for the adoption tax credit. Okay. But as far as the child tax credit, you need social security number for dependent care credit, you need social security number. And so that's why I you know, advise clients, if at all possible to wait and file that extension, get that social security number, because you're automatically automatically losing $1,500 right off the top, right off the top, you're losing $1,500 of child tax credit, and especially last year when it was you know, $3,600 it's a big deal. It's, and last
Unknown Speaker 58:38
year, it was also that $1,400 recovery rebate credit. Yeah. So,
Unknown Speaker 58:43
and with the stimulants with a stimulus recovery, rebate credits, you know, some of those things, they kept changing in the middle of the game. And so, by, by all means, you know, and sometimes what happens is when families get home, you know, they have that final judgment of adoption, they get home and kind of settle into life and, you know, trying to find their new normal, you know, there's one step they've got to finish, they've got to get that social security number, or new social security card, either changed name, or changed name and social security number, depending on the age of the child will determine if the Social Security office will let you change the number but I you know, particularly certain situations, I highly recommend that if you can get the number changed as well because maybe several people have had that number and have used that number and that you know, creates a whole nother mess when it comes to filing your taxes. But as far as the a 10 goes, you know, it limits what you can use it for. And so if you can wait and you know just soon as the adoption is final Go get that new social security card.
Unknown Speaker 1:00:02
Got it. So, I do want to point out two things related to social security in the filing, if you haven't been matched, or child hasn't been born, and you're doing private domestic, it will let you e file without a social security number, you do that if not, you have to paper file do right see attached and put information about your attorney or your agency you're working with, because you might, you might not have an actual living being to to get a number for but you're still eligible when you're impressive, private domestic. The other one that I want to highlight, because we get this, Becky made me think of this, if you're sometimes you know, I deal with a lot of kids adopted from the foster care system. And folks want to change that social security number, but they are not able to because things are really slow, or even changed the name. For the purposes of taxes, you need to go. Even if the courts recognize the child's name has changed, you need to go with what the Social Security ministration has on that. And then if the like so let's say I adopt, I adopt today, I'm filing my taxes, kids got a new name, I've so security number I have the old name. But that's what's in the Social Security Administration System. That's what the IRS sees. I'm going to use that old name, the old number, claim the adoption tax credit next year, sometime in the end in between time between the next year finally, and I have credit for it because I work in child welfare. And the number has changed or the name has changed or both have changed. I use the new number and social security mission or the IRS can access the records and see that what the change has happened. So you use what you got you don't you I mean, you could wait for an existing one for the change. But with the slowest things are I would just say file as it is. And then the next year with whatever the Social Security ministration has in their system for the child. And that's not a problem. I've talked with people at the IRS. And that's the advice they gave me because I get to call we were getting called
Unknown Speaker 1:02:08
Absolutely. And that's and that's what and that's exactly what I recommend to my clients. If they have an existing social security number with the old name, go ahead and use whatever like he said, whatever the Social Security has, that is what has to go on your tax return. And then once you get your refund, then you can get the change process started.
Dawn Davenport 1:02:32
Okay. And last question. This one's going back to you, Becky, it is not it is not necessary to hire a tax specialist if you're trying to claim the adoption tax credit. However, there are people who want to in particular, if they have if there's complexity or whatever, and they are they just we feel more comfortable knowing they're going to get it. How do you find a tax specialist that's knowledgeable on the adoption tax credit because we get questions all the time where people are being given incorrect advice. And we recommend In fact, I will tell you that I know that people have used this interview as this as a giving it to their tax preparer to help them get up to speed. So how do you find how do you determine if your tax specialist is knows anything?
Unknown Speaker 1:03:18
Well, the first thing I recommend is number one, ask a lot of questions. And don't ever be afraid to because you're talking about a 14,890 potential credit and exclusion. And if that person says you know, well, I really don't know anything. The first place you need to start is you need to start with the IRS directory of licensed prepares. Because there are a lot of people that do taxes that are not legal to do taxes. So I would first first that's the first place I would recommend you start and then ask don't ever be afraid to ask questions. I have a lot of you know, I'm an enrolled agent, which is the highest credentials you can get with the IRS. And I have enrolled agents I have CPA is I have other tax preparers call me, you know, because they're, their client is sitting across the desk from them and they they're just not knowledgeable, you know, on on the situation. So, you know, don't ever be afraid to ask questions. You know, and, and, and a lot of the, a lot of the issues it's not in putting the name in this social security number and, and all of those things, but the issue is is 90% of the time dealing with the IRS and intricate details because everybody's situation is different. You know, some some some situations are very simple, very cut and dry. You know, and some of them are very complicated. Take several years and a lot of time with the IRS to get straightened out. But the first the first place to start is go on the IRS directory. Find a link you'll prepare, and then start asking questions.
Unknown Speaker 1:05:03
I will say in fairness to tax preparers, there's like 60 to 100,000 of these filed a year. That's a small drop in the bucket because there's probably like 100 million returns filed a year. So if they don't know, for me, it's like, how much are they willing to ask questions? Some, I've dealt with some trying to help families where they act like they know everything, and how dare you non credentialed person. They're telling me and I've also had people, it's like, do you read the instructions? It's like, I'm like, because that's it's all eight pages. What? Why don't you read instructions?
Dawn Davenport 1:05:43
Yeah. And the last thing I would say is that you're not limited to a tax preparer that is geographically in our in your state or ranking. You are and so even, you know, the the US is your oyster, you have the entire US of which to choose. So if you're choosing that and you're claiming if this year, choose somebody who who does this and is knowledgeable and it's a good point that Josh just said that we shouldn't be condescending because there's so much tax preparers do need to know but not everybody is specializing in the adoption tax credit. Well, thank you so much. Becky Wilmoth with Bill's tax service and Josh Kroll with the North American Council on Adoptable Children, which goes by NACA concur, who mentioned that, so that, thank you both so much for being with us today. I truly appreciate it.
Transcribed by https://otter.ai