Creating a Family: Talk about Adoption & Foster Care

2021 Adoption Tax Credit

January 12, 2022 Creating a Family Season 16 Episode 2
Creating a Family: Talk about Adoption & Foster Care
2021 Adoption Tax Credit
Show Notes Transcript

Are you planning on claiming the Adoption Tax Credit this year? We talk with 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.

In this episode, we cover:

  • What is the Adoption Tax Credit for adoption being claimed on 2021 federal taxes? $14,440 per child
  • It is a non-refundable tax credit. How to advocate for refundability?
  • What is a “credit” and how does it differ from a deduction or some other form of tax savings?
  • If you get a tax refund every year, how would you use the Adoption Tax Credit?
  • If you don’t have any federal tax liability, should you still apply the credit to your federal income taxes?
  • What type of adoptions are included or excluded? Stepparent adoption? Embryo adoption? Same-sex partner second parent adoption? Unmarried heterosexual second parent adoption? Surrogacy?
  • Can you get credit for each adoption you complete even if completed in the same year? What about adopting siblings at the same time?
  • What is a Qualified Adoption Expense for purposes of the Adoption Tax Credit 2021?
  • When can you claim the Adoption Tax Credit?
    • Domestic private adoption
    • International Adoption
    • Re-adoption in the US for international adoption
    • Foster Care Adoption
  • How does the Adoption Tax Credit work with kinship adoptions? What if the child never was involved with the foster care?
  • Special Needs Adoption: How does the Adoption Tax Credit differ for adoptions from foster care? What does the IRS accept as proof of “special needs”?
  • Special needs child for international adoption?
  • Can you reclaim your expenses for a failed adoption? How?
  • What income level is excluded from claiming the Adoption Tax Credit in 2021?
  • How long can the credit be carried over?
  • Will the Adoption Tax Credit offset self-employment tax? 
  • Secure Act and Qualified birth or adoption distributions.
  • How does the Adoption Tax Credit work in conjunction with employee adoption benefits? For special needs adoption?
  • If you adopt, can you still get the Child Tax Credit? How does the timing work?
  • What do you need in order to get the Child Tax Credit for your adopted child? Social Security # for the child.
  • How does Advanced Tax Payments work with adoption?
  • What type of documentation for the Adoption Tax Credit should you submit with your taxes? What type of documentation should you keep in your records?
  • What should you do if you do not have your child’s social security number when you get ready to file your taxes? When should you consider using an Adoption Taxpayer Identification Number (ATIN #) or Individual Taxpayer Identification Number (ITIN #)?
  • What are the most common questions received about the Adoption Tax Credit?
  • How to find a tax specialist knowledgeable on the Adoption Tax Credit?

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0:00  
Welcome everyone to Creating a Family talk about adoption and foster care. As you probably know by this point, I'm Dawn Davenport both the host of this show as well as the director of creating a family.org. Today is our annual adoption tax credit show so would be adoption tax credit for the 2021 taxes. And we have that we have the gang all back here. Yet once again, we we are the are you are the adoption tax credit. Gang, we have Becky Wilmoth. She is an enrolled agent and Adoption Tax Credit Specialist with Bill's Tax service and Josh Kroll. He is the adoption subsidy Resource Center Coordinator at the North American Council on Adoptable Children and Josh, I think it would be fair to say that you also are their go to at the at NACAC for the adoption tax credit. Welcome, Josh. And Becky, back to creating a family. Thank you. Okay, so the adoption tax credit for adoptions being claimed on your 2021 taxes. Josh, what is the amount that we're able to claim this year? Your maximum amount per child is $14,440. And that's a per child. Gotcha. Okay. And, Josh, let's go ahead and talk about the the whole roof that we have to say because there was that one shining moment, a long, long time ago that this was a refundable. So we continue to get questions about whether it's refundable. So if you'll cover that, Josh, we'll get that out of the way. It's unfortunately still not refundable. There is a big push, there's more hope this year that it will be refundable. But it's there's still some hope that it might happen this year. But more likely, if there were any movement on it, it will happen in 2022 and be available for the next tax season. Gotcha. Okay, and why don't we go ahead. And we usually save this to the end. But if you could tell people where they would go to advocate for this, of getting the tax credit to become refundable, where would they get adoption tax credit.org is the website that folks are who are advocating for it could go and find out information about the bill numbers, and some tips on how to reach out to their members of Congress to add their voice to that effort. And we really encourage you to go to adoption tax credit.org and do just that because it is our advocacy that will make this happen. All right, Becky, there, I think continues to be with some people, particularly those who have not necessarily done their own taxes before or haven't had credits. To be some confusion between what is a credit, how it differs from

2:58  
deductions or any other form of taxation. Can you can you help us understand that distinction? Absolutely. A tax credit is always better than a deduction. But the difference between a tax deduction and a credit the tax deduction actually lowers your income. For example, like when you itemize your deductions, I realized fewer and fewer people can itemize their deductions now like mortgage interest, real estate taxes, charitable contributions, as when the standard deduction was doubled. It's harder and harder for people to itemize. But what that actually does those deductions lower your income.

3:47  
What a tax credit does, it actually helps cover your tax liability. So a tax deduction? Yes, it lowers your income, which lowers your tax, but a tax credit actually helps cover that tax liability before it ever gets to your withholding. So what that means is that tax credit actually helps you get a bigger refund because it is covering your tax. And so you are basically getting more of your withholding back and more of the refundable child tax credit back. So that's that's one of the reasons that the adoption tax credit is so important. And why every one of us are so passionate about this adoption tax credit and trying to get it refundable again because it does help more people when it's refundable, because when that tax liabilities met, if the adoption tax credit is refundable, they get the remaining portion of that whole adoption tax credit back at one time

5:00  
If it's undefined, it's not refundable. Yeah, correct. If it's right now, it's not refundable. But like, Josh was talking earlier, we are advocating very strongly for it to be refundable again. But since it is non refundable at this point, what that tax credit does it covers your tax liability. And then what you do not use you carry that forward for up to five years. So the tax credit is always better than a tax deduction. What about we sometimes hear from people, I get a refund every year, so I don't pay any taxes? What would you say to that? Well, and that's the confusion, what most people may not understand, unless you're actually looking at page two of your federal tax return. The difference between your tax liability and your withholding every year is what you get as a refund, or what you owe every year. So they may have tax liability and not realize it because that tax liability is being covered either by the child tax credit or by their withholding. So even even though they get a refund, you know, they probably have tax liability. Job. Some people don't have tax liability for various reasons. So is there any reason for those people to apply for the federal income taxes? Yes, because the credit has a six year it's a total of six years to the year, you're claiming the credit, which for most adoptions is the year it's finalized. But you have up to five additional years to use it. So if the adoption tax rate either becomes refundable, or their financial circumstances change, then claiming the credit has it on the record, and they wouldn't have to go back to amend their return to establish it. So that's generally why we would recommend to people to still file and claim it even if there's not the ability to use it in the year that they're claiming the credit. Okay, so Josh, what type of adoptions are included, and I guess also which ones are excluded from the adoption tax credit.

7:12  
So there's basically three types of adoptions that are included, there is adoption from foster care, there is private domestic adoptions, whether through an agency or independent through either an attorney or a facilitator. And then there's international adoptions. Any of those apply, and I want to really stress as more and more kin are adopting, being related to the child does not exclude you. So if you're a grandparent and uncle, a cousin, even sometimes sibling adopted the child that does not exclude you, the only people that are excluded is folks adopting doing step parent adoptions, that is adopting your spouse's child. If you are an unmarried couple, and you're adopting your partner who you're not married, whose child that would still be eligible.

8:09  
So unmarried second pair in the dots. So if you're unmarried, but you are adopting your partner's child, that is included. But if you're married and adopting your partner or your spouse's child that is not included. Correct. Okay, what about same sex partners and second parent adoptions? Josh? I'll go ahead and keep this one with you. It all depends married or not. Okay, got so the same same sex or heterosexual doesn't matter. All right. All right, Becky, can you get the credit for each adoption you complete, even if it's completed in the same year? So like, if you're adopting a sibling group or two unrelated kids, and the adoption isn't the same year? Can you get two credits? Or is it one credit per year, or one credit per child?

8:58  
It is it is one credit per child. And so you would absolutely take both for that year. And what you did not use, you would carry that forward to the next year. And I just want to add to that, because there are families that adopt sibling groups more than three. And I'm not sure how the software works. But I know in the past folks doing the taxes by hand would say there's only in the old days, there were only spots for child one and two these days. There's spots for child one, two, and three. If you're adopting four, you fill out another form 8839 to claim that fourth child and claimed credit for that fourth child, and that's in the instruction. So, don't if you're adopting more than a sibling group of three, still take it for each child just it's a little more work. Okay, excellent. That's a good point. Because we do see people adopting sibling groups for five, sometimes even more.

9:57  
All right, the key term it feels like

10:00  
In the in the regulations and the IRS guidance is qualified adoption expense. So Becky, what is a qualified adoption expense for the purposes of the adoption tax credits being claimed here in 2021, taxes being claimed 2022. Or for IRS regulations, it is any necessary and reasonable expenses directly related to the adoption of eligible child. So that can include home study fees, legal fees, court fees, attorney fees, traveling expenses, like when you're traveling, it's meals, hotel, flying gas, there is not a mileage rate for adoption. So it would be good for gas receipts. But dossiers, I mean, there's so many expenses that fall under that are directly related to the adoption, for international adoption. Sometimes, when you get into the foreign country, you're required to get a cell phone strictly for the orphanage to contact you. So that would be a legal expense directly related. Now, things like that you would purchase for any other child is not considered reasonable and necessary, specifically, for the adoption, like a set of bunk beds, or, you know, those are things that you wouldn't normally buy. And generally, I always tell my clients, you know, let's let's start with the big ones first. You know, in generally, for private, domestic and international, you know, it's going to be legal fees, attorney fees, travel, you know, those are start with the big ones, and then worry about the little ones later, as far as expenses to get to, you know, that maximum amount, you know, that you're that we're trying to reach at 14 14,440. Right, exactly. I think that is such good advice. People ask questions about such minor expenses. And generally speaking, I think as you're pointing out, for domestic infant or for international, you're going to use up the credit with a with your big rocks that are the big expenses. So you don't need to worry about some of the of the smaller generally speaking, I realize there are exceptions to that. But generally speaking, that would be the case. Okay.

12:28  
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13:16  
Alright, now, Josh, what are the one of the more confusing things about the adoption tax credit? Is the distinctions on when you can claim it depending on the type of adoption that you're doing. So let's start with domestic infant adoption. When can you claim the adoption tax credit?

13:39  
For a domestic infant adoption or private? I would say there are some domestic privates that aren't infant adoptions that you can claim the credit you're actually supposed to claim the credit the year after you pay the expense. If it is not final, or the year the expenses paid, if it is final. So let's say I started the adoption process in 2019. Or let's say 2020. I started the adoption process in 2020. I just got placed with the child I'm going to finalize in 2022 Whatever I paid in 2020. I will take on my 2021 taxes, and then in 2022, whatever I paid in both year 2021 and 22. Because that's the year I'm finalizing, I'll take on my 2022 taxes, plus if I have any carry forward from the amount I claimed on my 2021 taxes. Okay. Now how does that differ with international adoptions? international adoptions must be final. There is some flexibility when it's considered final if it's final in country. You can take it that year. If you have to finalize back in the US. You can also choose that year if it ends up being tax favorable.

15:00  
and most often that would be per family that's close over income or over income one year, but not the other year, and choosing which to use. What about if families choose to readapt that their adoption was finalized in the country, but for various reasons, maybe they want to have a US paperwork showing, so they readopt or they want to have a birth certificate or whatever. But that's the flexibility that the IRS has allowed, okay, so that then you can if you re adopt, then you could choose that year, if you so choose. But if you're not in your over income, you probably want that money sooner than later. So you'll probably choose the year in country. But if you're, you're close to the income limits, that might reduce the amount of credit you have available. That's the only I mean, Becky probably knows more, since she's the actual tax professional, but that's my understanding is the reason people might choose one or the other. All right, and then they last but back anything to add to that, before we move to foster care adoption, you have two years to if you are going to re adopt, when you get back in the country, you have two years to do that. But you have to choose, you know, you can't take the adoption tax credit, and then decide where we're going to re adopt. And and, you know, take the additional, you have to make that distinction before. And generally it is absolutely an income threshold decision. Because I mean, you, as Josh said, you have invested a lot of money up to this point. So you know, you you're going to, you know, want to recoup that, you know, as quickly as possible. But if you know that you're going to readapt, because some states, depending on the country that you adopt from, depending on the state that you live in, you need to make that decision ahead of time. And, and obviously, if it's an income issue in your are going to readopt, you know, the adoption tax credit does bump up, you know, a few $100 every year. So that will be just that much more that you will be able to recoup, if you're going to readopt by that adoption tax credit, being a higher amount, you know, possibly the next year or the year after that, when you know, you're going to readopt. Okay. And Josh, just to finalize to go back through our list of when you can claim the adoption tax credit. We've talked about domestic infant or private good plants or the more private adoption, international adoption. Then we talked about including re adoptions. What about when can you claim for foster care adopting from foster care.

17:35  
So what we haven't talked about in the qualified adoption experience part and factors into the timing issue for foster care adoptions. Most foster care adoptions don't have much if any qualified adoption expenses that did the prospective adoptive parent are paying. So what happens if that child receives adoption assistance or adoption subsidy, or for the folks in Washington State adoption support that monthly payment or Medicaid with a $0 agreement or the reimbursement non recurring, they get to claim the full amount of the credit regardless what they pay? If that is the route they're going to, to utilize the adoption tax credit. It's the year they finalize, there are some instances where adoption from foster care may have out of pocket expenses, like other private domestic adoptions. And in those cases, if they have those expenses before finalization, they would claim those expenses the year after they pay them. And that would be most likely. Sometimes folks who go through private agencies but then end up adopting kids from foster care and do have a fair bit of expenses. Or sometimes there is fights with the foster care system over permanency decisions, and they may be fighting and paying attorney fees over that. That's the other most common one that I've heard of. But if it's not tied to expenses that are paid out of pocket, it's going to it's tied to the child being determined special needs. It's going to be the year that the adoption is finalized. Before we leave this I just want to make sure that we're fully understanding if as let's usually it's the case as a foster parent, you are paying legal fees because you disagree with decisions that they state child welfare agency is making on permanency you are fighting them you pay legal fees. Becky, are those legal fees, a qualified adoption expense for the purposes of the adoption tax credit? Yes, they are generally, they you know, do not add up to the amount the maximum amount that the foster care adoptions are qualified for if they have that subsidy agreement, so they would still qualify

20:00  
For the full amount of the credit, so they obviously would want to take that rather than just the legal fees that they are less. But something that I want to make very, very clear, and I've seen this a lot, is sometimes people think that, oh, well, I had expenses, you know, concerning like this situation where they had maybe some legal fees or something along the way that are quite a bit less than the maximum amount that they actually qualify for. They think well, oh, that Well, that's all that I qualify for. That is not the case at all. And so, you know, no matter if you do your own taxes, or somebody else does your taxes, and if somebody tells you, you don't qualify for that full amount, find somebody else, because I've seen it time and time, again, where families have actually qualified for the full amount of the adoption tax credit, because they have that subsidy agreement with the state for the foster child that they adopted. And maybe they did have 1000 or 2000. In expenses, you know, along the way. So absolutely. You know, make sure that you take that full amount of the adoption tax credit, if you have that subsidy agreement. And not just if you had some expenses, know that normally foster care adoptions don't have. But if your cases is one of the rare cases that you do have expenses, you still qualify for the full amount of that 14 for 40. If you have that subsidy agreement, okay, we're kind of talking around it. So let's just hit it, hit it head on. So what Becky, what is the distinction? How are adoptions from foster care treated differently under the adoption tax credit than other types of adoptions?

21:52  
Well, what qualifies them for the full amount of credit? Is that subsidy agreement, it's, it's called different things in different states, Josh and I both deal, you know, with with a lot of different states, you know, on a daily basis, so, you know, different states call it different things. But it basically means that either you are receiving a subsidy payment every month, because the child has declared special needs. And what you and I consider special needs and what the IRS considers special needs, is to complete different sentences the IRS considers hard to place without a subsidy agreement. And so that could be the monthly payment. That could be medical, it could be daycare, I mean, there's there's all all different things that can be tied up in that subsidy agreement. So if you have that subsidy agreement with the state, whatever state that you're in, for example, Illinois calls it adoption assistance, eligibility determination, okay. But the English version of that is the subsidy agreement that you signed with the state when the adoptions final. So because the child is hard to place without that subsidy agreement. So in simple down version of all of that, if you have that agreement with the state, when that adoption is final, out of the foster care system, you qualify for the full amount of the credit. So but as I said, the IRS that subsidy agreement, if it's a foster care adoption, that subsidy agreement, and that final judgment of adoption, is what qualifies you for the full amount of that adoption tax credit. So you don't want Don't let anybody else tell you that you don't qualify because you do. So just to be clear, making sure that I'm clear. Even if you let's say you have $500 of expenses, no more, you still are eligible if you are adopting from foster care to receive credit off of your federal tax liability for 14,440. Have I got that correctly? If you have the subsidy, if you have Yeah, that was the important part I left out if you have the subsidy agreement, I want to clarify on the subsidy agreement. So because you know, as you introduce me, I'm the coordinator of the adoption subsidy resource centers. So this is actually what I do more than the tax credit. And you'll hear called stipend per diem maintenance, you know, different things. But it has the adoption assistance agreement, it has to have at least one of three things, either the monthly payment, Medicaid, or the reimbursement of non recurring adoption expenses. If the state does one of those three things. That is enough. Now unfortunately, it fortunately there are some states that do $0 agreements. I'm in Minnesota, we do $0 agreements, but Medicaid comes with that. That would qualify many states to $0 agreements because they're young

25:00  
Kids, they don't have diagnosis, but they're at risk. And that's a great thing. But like there's one state Georgia that does $0 agreements, but they don't give them the Medicaid or the reimbursement. That will not qualify. And we've had that conversation with the IRS before, but most states will provide at least the Medicaid or the non recurring adoption expenses to qualify. And you know, if you have subsidy questions, I'm that guy also. So you guys wanted to? Absolutely, yeah, just want to clarify that. So. Oh, and one other thing to clarify. Sorry, guys, I got one hobbyhorse is there are some not often but there are sometimes private agency or private domestic adoptions, where it's not from foster care where the child can receive adoption assistance, they will also qualify for the full amount regardless of expenses they paid. Okay, so if that's isn't that a fairly unusual scenario or not, as far as getting the child to qualify for a subsidy, if they have if they're not in foster care, I'm usually the person that gets those questions. So I probably think it's more common than it really is. But yeah, that's a valid point. Yeah, yeah. Okay, we and we have to say this, because we get this question every year. Josh, I've, if somebody has adopted a child with special needs, and it's an international adoption, the child clearly has special needs, has medical needs, emotional needs, whatever it is that is that, is that make that child eligible for the special needs criteria under the adoptive tax credit, and that is that they would get the could they get the full subsidy, regardless of their expenses? About the full tax credit? Tax Credit? Yes, thank you. So a couple things I'm gonna throw in here. First, the answer is no. In law, international adoptions by law cannot be considered special needs for the Federal adoption tax credit for folks, both private domestic and international who are thinking along that route? And it is a common question. It doesn't do anything more than what you max out. And most international, I've never heard of an international adoption recently that cost less than exactly 15,000. Yeah. So it wouldn't change the reality, generally, for them. So it's one of those things that it's like, even if you could, it probably wouldn't change the end result. So don't sweat it. Yeah, private domestic. It really is that subsidy determination. Without that you could be adopting privately a child that's, you know, cerebral palsy, Down Syndrome clearly has a disability, you know, most people would consider a special needs. But without that determination from the state, the IRS will not accept that as special needs, because the statutory language has the word the state has determined. And that has actually gone to tax court. And the family who was trying to claim a child that met the state's special needs criteria, but was not determined by the state because it was a private adoption, was denied the special needs criteria.

28:10  
Okay, or, you know, benefit under your under the adoption tax credit, exactly.

28:16  
We hope that today's podcast has been helpful to you, as you try to understand better the adoption tax credit. If so, would you please tell a friend that you learned about this on the creating a family.org podcast, we get most of our new subscribers from word of mouth, and we could really use the words coming from your mouth to help us. Thank you so much.

28:42  
All right. Another question that is a common one, Becky, I'll throw this one to you. Can you reclaim your expenses for a failed adoption? And if so, give us a scenario of how that would work. So the purposes here, well, let's just say a failed adoption, it would be any type of failed adoption. Well, for a domestic private adoption, it is the same as if you know the adoption is not final. It is domestic private adoption is the only one that you are eligible to wait until the following year to claim those expenses. So for example, you had a failed adoption in 2020. And you pay those expenses in 2020. You would be able to claim those on your 2021 tax return that everybody is getting ready to do here in just a few short weeks, it's going to start so and what happens is when you claim those failed expenses, whatever credit that you receive from those failed adoption expenses, and then you have a successful one, the amount of the credit that you receive on those failed

30:00  
adoption expenses, you would deduct that from the successful adoption that you have after that, and then you would basically start over with the amount that you're eligible to claim. But if you had private domestic and the adoption failed, or it's not final, same rules, you wait until the following year, and you can claim those expenses. Okay, let me make sure I'm understanding this. If you applied it, let's say you're doing a domestic private adoption, you apply your match, do you pay a birth mom expenses, you pay other, you've had travel cost, whatever. So you've incurred expenses? The baby is born, the mom decides to parent. So the adoption is not finalized. Those expenses you have incurred would be how would they be treated with that, and then the following year, you are later that year, you you get matched again, this time the mom decides to place and so you have a successful finalized adoption, do all the expenses for the first failed match? And they do? And then the final one, are they all lumped together to be applied for one adoption tax credit? Is that how that would work? Yes, that is everything except birth mother expenses. birth mother expenses do not qualify as adoption expenses, because it violates federal and state law. So you know, if it is if it does happen in the same year, for example, you would combine those as as if it was one. And if it happens in separate years, you don't get two credits, you don't get a 14 for 40 for for the failed one. And then the following your 14 for 40. For the successful adoption, is that correct? That is correct. So if you if you file, you know, the prior year for expenses that you that you had paid in a previous year, whatever expenses, whatever credit amount that you received, for that failed adoption, you will then deduct that, from the successful one. If it's the following year, what happens if you have a failed adoption? You claim the expenses, and you will never have a successful? Let's say you just decide to not adopt? What happens then? Nothing. Can you claim your can you claim that? Let's say you were out 14, for 40? Can you claim that? Yes, you can. So up to whatever that maximum amount is that year? That is the maximum amount that you would be able to claim? Even if you never have a five even if you never have, right, okay, that is right, if you never have a successful when after that, whatever that year is that you claim, you can claim those up to the maximum amount. So let's say you had a failed adoption, and that was 5001 year, and then you have another failed adoption. And it was another 5000. And you see where I'm going with this? Whatever, whenever you hit that maximum amount, that's where it stops. Excellent. Let's see. So Josh, what income level? Where do you start? Is the 14 440. At some point, does it start reducing based on income level? Yep, it starts to 216,660. And it's always a 40,000 range. So it starts being prorated at that point. And then after 256,660, if your income the year, you're claiming the credit is over that amount, you will not be eligible, if it's over that, because you're over income. But I want to really stress that it's only the year you're claiming the credit. If you if let's say you're lower income one year, you know, maybe with COVID, you are unemployed for the year, and you're you're claiming the credit, you can't use much of it. But the next year, you get some job that pays, you know, 300,000 a year somehow or combined 300,000 a year that won't impact the carry forward. It's only in the year you're claiming credit that the income test matters. Alright, let's talk about self employment tax. And, Becky, will the adoption tax credit offset self employment tax? Okay only be used to offset federal income tax liability. Since the adoption tax credit is non refundable at this point. There are some things that it does not cover, self employment tax is not covered. The 10% penalty for early withdrawal from retirement is not covered. And then first time homebuyer payback is not covered.

35:00  
However, because of the 10% penalty penalty, caveat that is in that there is now a what is called a cube owed, if you have a an adoption or a birth

35:15  
can take a distribution from an eligible retirement plan up to $5,000 without the 10% penalty if you're under 59 and a half. So that is one. And that is because of the secure Act that was signed. That is a new couple of years ago, qualified birth or adoption distribution, because for many years, we saw families would take money out of their retirement to help, you know, get some extra money to to complete the adoption, and they would have to pay that 10% penalty. And that penalty was not covered under the adoption tax credit, because it was non refundable. So because of the secure act, they can, each spouse actually can take out $5,000 without that 10% penalty if they're under 59 and a half. But as I said your original question, you know, since it's non refundable, self employment tax is not covered, unfortunately. And that is one of the one of the big reasons why we advocate so strongly to try to get it refundable again. So self employment tax would be covered, if it becomes refundable again. Okay, gotcha. And thank you for sharing that about the secure act and how that applies.

36:38  
Okay. Another thing to consider is if you receive employee benefits, many companies, unfortunately, we see an increase, and we hope to continue to see an increase in companies that offer adoption benefits for their employees. So Josh, how to employ adoption benefits working with the adoption tax credit, there is a portion of the adoption tax credit form 8839 For exclusions, so what would happen is, let's say your employer gives you a $5,000 benefit, it shows up on your W two, you would exclude that benefit from your income, it interacts with the adoption tax credit, in terms of it is used, qualified adoption expenses for private, domestic or international are applied to the exclusion first, and then the remainder to the adoption tax credit. So if I had $5,000, from my employer, and I'm, let's say I found a private domestic adoption of the cost me 16,000, I would exclude 5000. And then I went would only have 11,000 available for the adoption tax credit, because my total cost was 16,000. For a special needs adoptions, the employer has to have such a program, they do not have to pay disbursement out of it, you don't actually have to receive money from the employer. But you if it's special needs, if you get that adoption assistance, you get to claim an exclusion of 14,440 in that case, and then that makes sense, because basically what they're saying is that you get that regardless of expenses. No. Okay. Becky, how does all this fit in with the child tax credit? First of all, if you adopt Can you still get the child tax credit? And how does the timing work? Or is it completely, just totally unrelated? Well, the key for the child tax credit is Social Security number, you absolutely qualify for the child tax credit and the adoption tax credit, which for 2021, the child tax credit was made fully refundable, which normally 600 of it is non refundable and 1400 of it was refundable, you know, for the maximum amount of 2000. Well, for 2021 for under six years of age, it was it's $3,600.04. Six to age 17 is $3,000. And they're both fully refundable. But the key to all of that is Social Security number, you cannot receive child tax credit with an A 10 adoption, taxpayer identification number, you have to have a social security number in order to claim the top tax credit. And one of the things that we have seen because of adoption, you know, you know, within the last two years because of a stimulus payments, people have not qualified because they did not have the social security number by the due date of the tax return. So that's one

40:00  
The reasons I always always always recommend that if you don't have the social security number yet, to file an extension and wait for that social security number, because you know, you lose quite a bit, if you don't have that social security number, you lose the Child Tax Credit. Because with a 10, you can only claim the other the $500 other dependent credit, and the adoption tax credit, but with a social security number is worth waiting for. Because you can't claim the child tax credit, and the adoption tax credit. And so the social security number is the whole key to all of this, you know, the last two years, with the child tax credit with the advanced child tax credit payments that people received this year from a monthly basis, from July to Tuesday, December the 15th. You know, unless they went on the IRS, Child Tax Credit portal, and opted out of it. So they they would receive unless they opted out, they would receive half of the child tax credit in advance. So therefore, when this is all reconciled on their 2021 tax return, that they will do, you know, after the first of the year. So if they received, you know, half of that in advance, that means half of their child tax credit is going to be cut in half when they do their tax return. So the biggest issue, like I said is, you know, if you don't have that social security number yet, file an extension, wait on that social security number, because that's the key to, to the stimulus payments is the key to the child tax credit. It's the key to a lot of credits. That makes sense. And I don't know what but for a while there, we were hearing that people were waiting really long to get their child's social security number that may have picked up in recent months. It hasn't improved. Oh, good. Good. There. Yeah. there for a while it was you know, because so many big security administration was shut down, IRS was shut down. That's why they are still at least six to nine, the IRS is still six to nine months behind on everything. Because everything was shut down. And because they were working on stimulus payments, not on return. Gotcha. Yeah. So we were hearing from people that they couldn't, they just simply couldn't get they filed everything. But we're waiting and waiting. But I'm glad to hear that has improved. Alright, Becky, I always this question to you what type of documentation do families need for their adoption tax credit? And should it be submitted when you submit your taxes?

42:51  
Well, thankfully, now, the last several years, the form 8839 can now be electronically filed with your return. So documentation is not required to be sent in the the request for documentation has reduced significantly over the last few years. However, occasionally, you know, we do have the IRS does request documentation if there's an if there's an issue, particularly if if someone is claiming a child that shouldn't be because they have, you know, been been adopted by someone else. So that's sometimes an issue. But for what we'll we'll start with all adoptions for, I always recommend that you get a big manila envelope market IRS documentation. That way in the event that you do get a letter from the IRS requesting more documentation, don't panic, you know, you've already got that documentation in that envelope ready to go. You will need to keep in that envelope. If the IRS requests more documentation, you will need the final judgment of adoption final decree of adoption, certificate of adoption. Whatever it is, it is called but it must be the signed and dated copy through the finalization authorities. for foster care adoptions, you will need that final judgment of adoption and the copy of the signed and dated subsidy agreement that is signed and dated by whatever authority whatever state that you are adopting in for all adoptions other than Foster, you will need the final judgment of adoption, the home study placement agreements and all those you know again must be signed by the authorities. And then for domestic, private and for international adoption. You will need documentation of all the paid qualified expenses and like I said for all

45:00  
For all adoptions, the you know, you those have to be signed by authorities, the IRS will not accept the home study placement agreement or the judgment of adoption, or the subsidy eligibility agreement without those being signed by the authorities. And one thing that I also highly recommend, along with putting these in a manila envelope, so you have them in one spot, you know, make sure you come home with those things. Because in the past, that's kind of been an issue. Sometimes, families may not come home with the right documentation, or they may not understand what the IRS is requesting. Yes. So that's the important thing is, and if they request documentation, don't ever send the originals. always send good copies. And whoever is the primary taxpayer, on the tax return, put their social security number in red sharpie, at the top of every single page. Because sometimes what happens is when a tax return, you know, or documentation, or if they go together or separate, you know, they they wind up being separated. And so if you put that social security number, at the top of every page, even even the letter that the IRS sent to requesting documentation, in that way, it will get right to the right account, and have less chance of getting lost or, or not getting to where it needs to go. And we think it wasn't last year, like a couple of years ago, we heard from somebody who had listened to the annual creating family annual adoption tax credit show heard you say that did that and they let us know that they found out afterwards that they're some of their file had just gotten separated. And it took a while. But eventually, because they had done that everything got back together. And it worked out. They didn't they never actually had to get involved. So important advice right there. Yes. Excellent. And can credit card receipts? Does that work? Just your credit card? The not your printer I received that your credit card payment invoice that you get? Can that count for your documentation? Or do you need the actual receipt from the from whatever it is that you've paid? A credit card will work? Because just the same way with medical expenses, because that credit card was charged, let's say in July of 2021. That is considered paid. So absolutely. Okay. Perfect. Josh, I wanted to go back to something you had said before about kinship adoptions. And I'm I meant to raise it them. So you said that that kinship adoptions do work. But what if the child was never involved with foster care that grades started as an informal kinship arrangement? It'd be like other private domestic adoptions? Okay, the child's not in the foster care system, they probably have some out of, you know, some qualified adoption expenses that they can claim the credit against. And if the child was in the system, then it goes back to whether they have the subsidy agreement. Correct. Gotcha. You know, as we work with kinship families, it occurs to me this is something that needs to be pointed out when they're trying to decide at the very beginning, whether they want to get involved with foster care and their advantages and disadvantages. From a kinship perspective. My experience is more often than not, they're not given a choice, or they're tried to, oftentimes are pushed to be not in foster care to save states money. Yeah, and I'm hoping that that's changing some. But

48:56  
as my grandmother would say, hope in one hand, spit in the other so yeah, there you go.

49:02  
Hey, guys, let me stop a moment to thank Vista Del Mar. They have been a long time partner with creating a family and supporting this show as well as our other things that we do other resources we create. They are this Bill Maher is a licensed nonprofit adoption agency with over 65 years of experience helping to create families. They offer a home study only service as well as full service at pet adoption, international home studies and post adoption support as well as a foster to adopt program. You can find them online at vista del mar.org/adoption. Thanks Vista Del Mar.

49:45  
Alright, Josh, what are if you could pick one or two of the most common questions you get about the adoption tax credit, what would they be?

49:55  
Well, the how does it work or you know, how would it benefit me and

50:00  
And then what is special needs are probably the two most common that I get. And so like my standard example, and it works this year with it, not refundable. But let's say NEC, withholds $5,000 From my paychecks, that shows up on my w two, I go and do my taxes, and I'm boring guy. So most people have boring taxes. Thankfully, not everybody does. It keeps, you know, Becky and business there. But I bought in taxes, the tax table, say, Oh, $4,000 in a normal year, I get $1,000 refund. Because you know, I paid in five, I only owed four. So I get $1,000 refund to me. But you know, I've now adopted a child, and I 14,414 adoption tax credit, I use 4000 of that to wipe out the 4000 and I owe from the tax tables. And I now owe zero, I get all 5000 refunded to me that I had withheld, and then the remaining 10,440 carries forward to my 2020 taxes. And I keep doing that until I either use up the credit or total of six years have passed. And as we discussed earlier for special needs, it's really going to be tied to that adoption assistance agreement. All right, excellent. Becky, what are the most common questions that you receive at the beginning? About the adoption tax credit?

51:21  
The same questions that Josh had, but but the the biggest issue, most people the non refundable, and then refundable. Um, what's what's the difference how it works on their tax return? So the the biggest the biggest issue is understanding federal tax liability. That that's that's the, I would say number two is, what is federal tax liability? You know, most, you know, unless you're a tax geek like I am, you know, most people don't understand, you know, what federal tax liability actually is. And so that's kind of like Josh said, you know, when you've got so much withholding, and this is your tax liability, you know, I'm old enough dawn that, you know, I remember, you know, you would figure up your your adjusted gross income, and then you'd go to the tax book, and you will cross the line and find out what your tax is. And then the difference between those two. And the other one, I would say probably is, what is modified adjusted gross income. Because most people when they look at their tax return bottom of page one, it has their adjusted gross income. Well, for the adoption tax credit, it's modified adjusted gross income when it comes to the income phase out ranges. So that modified adjusted gross income is basically what we would always call front page deductions or above the line deductions. And so those things are added back in to that adjusted gross income. For example, like the student loan interest deduction, or traditional IRA contributions that allow for a if you qualify for that front page deduction above the line deduction. That's what modifies the difference between modified adjusted gross income and adjusted gross income. Gotcha. And the last question, Becky, how to find a tax specialist that actually knows something about the adoption tax credit? Well, the first place that everyone always needs to start is go on IRS website and there is you can search for prepares on that website, whether they are an enrolled agent, like I am, an enrolled agent specializes in taxation. You know, there are there are CPAs that do taxes, but most of the time, they specialize in bookkeeping and accounting and payroll and all of those things. So most of the time, you're going to want to look for an enrolled agent, and ask questions. Don't ever be afraid to ask questions. How many adoption tax credit returns? Do you do a year? How, you know, how many cases have you won against the IRS? You know, do you know Do you know the ins and outs. So you know it's important don't ever be afraid to ask questions. And do you need to use a tax preparer that is local to you or at least or even in your state? Or can you go to someone who is not in your state?

54:46  
You can absolutely use a remote prepare. I did 42 Different states last year. I love technology and like I said I'm a geek. So you know we have a secure portal and and most tax preparation

55:00  
Should places you know, do have secure portals now, you know, the main, the main things done, I think is number one, you need to find someone number one with a good reputation. Number two that is legally qualified to prepare returns, you know, the IRS in the past few years, has worked very diligently trying to find what we would call ghost prepares, where they would prepare a turn, but they wouldn't sign their name to it. And so you know, and when you have IRS issues, you're basically on your own, you know, if you use a ghost prepare, so you go to go to that IRS website, you know, they their qualifications, whether you're an EA, or a CPA, or, you know, if they have the AFSP designation, where they have just taken, you know, the basic tests used to be called registered tax return, prepare our TRP now, it's called AFSP. You know, those, those people that are on that database, at least have a minimum amount of knowledge of taxation, and, and hopefully tax preparation. But if you, you know, if you there's, you know, the they always say the devils in the details, you know, every situation is different. There is, you know, Josh, and I deal with it on a daily basis, the details, everybody has a different situation, different circumstances, you know, different things going on with that certain type of adoption. So, you know, don't ever be afraid to ask questions, you know, just call the person or email the person and say, hey, you know, what do you know about this? This is my situation. Have you dealt with this before? You know, and if, you know, I've, I've had clients that have said, you know, we'll everybody told me that I didn't qualify for the adoption tax credit. And I talked to him less than 20 minutes, and I knew that they call not only did they qualify for the adoption tax credit, they qualified for the full amount of the adoption tax credit. And we went back and amended three years of returns, and got him back. $46,000. So, you know, don't ever be afraid to ask questions. If they tell you, especially if they tell you you don't qualify when every adoption qualifies, but the adoption of a stepchild, so, you know, ask questions. Okay. Excellent. Good advice across life actually ask questions. All right, one last plug for Adoption Tax credit.org. Very important. For those of us who are advocating for to make this tax credit, refundable. Please go this easy site to navigate Adoption Tax credit.org. Josh, last word goes to you. Alright, so one, you don't if you do your own taxes, you don't have to hire someone. If you're worried about calculating, modified adjusted gross income software will do that for you. If you do hire someone, and they don't understand special needs adoption, you need to tell them to look at the instructions specifically line one, column D example one and line five special needs adaption. If they don't understand them take Becky's advice from earlier find someone else. But you if you do your own taxes, you don't necessarily have to hire someone for that. Yeah, that's a very good point. That's a very good point. All right. Excellent. Thank you so much, Josh Kroll and Becky Wilma for being with us to talk about the adoption tax credit. It is the appropriate time of year. Thank you very much, guys. And to everyone else. Thanks for joining us, and I will see you next week.

Transcribed by https://otter.ai