Tax Issues for Adoptive Parents

By William E. Lincoln, CPA, Tax Manager

This is an informational guide designed to address income tax issues that pertain to adoptive parents. This is intended to be a brief summary, it would be impossible to address every income tax issue or personal situation. If you have questions about the various tax issues, please review the 1040 instructions, the IRS website and the other resources that are referenced. There are hyperlinks to websites in this document to direct you to applicable forms and instructions (if you are reading the electronic version of this document, your internet browser will open the website if you click on the hyperlinks.)

Please note - you must have an SSN, ATIN or ITIN for the child in order to claim the child as a dependent or utilize the adoption credit or any other tax credits related to dependent children on your income tax return.

Types of ID Numbers for Your Adopted Child

Social Security Number (SSN) - You should apply for a Social Security Number as soon as possible after the adoption is finalized . If you are adopting a child that already has an SSN , it is very important for you to get the child's SSN from their birth parents, adoption agency, etc. If you are unable to get the child's SSN, or if the adoption will not be finalized in time to get an SSN prior to the filing deadline for your tax return, you should apply for an Adoption Taxpayer Identification Number (ATIN) or Individual Taxpayer Identification Number (ITIN), see below.

If you have adopted a child that has never been issued an SSN, including a child from outside the United States, you should apply for an SSN with the Social Security Administration (SSA) using form SS-5. If the child has an SSN, but the name of the child has been changed, apply for a new SS card with the SSA using form SS-5. You will need to provide the SSA with a certified copy of the Final Adoption Decree and either the Birth Certificate or a record of the child's birth from the hospital of their birth. It typically takes four to eight weeks for the SSN to be issued, so be sure to allow time to get the SSN prior to filing your income tax return.

Adoption Taxpayer Identification Number (ATIN) - An Adoption Taxpayer Identification Number is issued by the Internal Revenue Service as a temporary taxpayer identification number for the child in a domestic adoption (or an international adoption under certain circumstances) where the adoptive parents do not have and are unable to obtain the child's SSN.

To apply for an ATIN, you must complete form W-7A. When you submit the W-7A, you will need to provide a copy of the placement agreement, court order, or document from the hospital authorizing the release of a newborn child to you for legal adoption. It typically takes four to eight weeks for the ATIN to be issued, so be sure to allow time to get the ATIN prior to filing your income tax return.

The ATIN is only valid for two years. If the adoption is finalized prior to the expiration of the ATIN, an SSN should be applied for with the Social Security Administration using form SS-5. If the adoption has not been finalized prior to the ATIN expiration, you can apply for an extension of the ATIN. The IRS will send instructions to extend the ATIN about six months prior to its expiration.

Individual Taxpayer Identification Number (ITIN) - An Individual Taxpayer Identification Number is issued by the Internal Revenue Service as a taxpayer identification number for a child that is a resident or nonresident alien and not eligible for an SSN . International adoptions where the child does not meet the criteria for an ATIN should apply for an ITIN.

To apply for an ITIN, you must complete form W-7. When you submit the W-7, you will need to provide an original completed tax return and certified copies of the documents to substantiate the information entered on the W-7 form. It typically takes six to ten weeks for the ITIN to be issued.

Tax Credits for Adoptive Parents

A tax credit is a dollar-for-dollar reduction of your income tax liability. Tax credits are typically much more advantageous than tax deductions.

Adoption Credit - Adoptive parents may be able to receive a tax credit for qualifying expenses paid to adopt an eligible child. The maximum credit for 2010 is $13,170 per adopted child. The adoption credit is claimed using tax form 8839 (2010 version not yet released at the time of this writing). The adoption credit cannot be used prior to the year that the adoption is finalized. The credit begins to be reduced for taxpayers with adjusted gross income in excess of $182,520. For 2010 and 2011, the Adoption Tax Credit is a refundable tax credit! This means that if your adoption tax credit exceeds the amount of tax on your tax return, you will be entitled to a refund of at least the amount that the credit exceeds the tax. (In previous years, the excess amount had to be carried forward to offset the tax in future years - so it could take several years to receive the full benefit of the credit.)

Qualified adoption expenses include adoption fees, attorney fees, court costs, travel expenses and other costs directly related to the purpose of legally adopting an eligible child. These expenses may occur prior to the year that the adoption is finalized. An eligible child must be under 18 years of age, or physically or mentally unable to care for themselves. In the case of an adoption of a special needs child, the adoptive parents may be eligible for the full amount of the adoption tax credit, regardless of the amount of adoption expenses incurred.

Costs of adopting a spouse's child, surrogate parenting arrangements, or payments that violate state laws do not qualify for the adoption credit.

Child Tax Credit - Parents of children under the age of 17 may be able to claim a non-refundable credit of up to $1,000 per child under the age of 17. The Child Tax Credit that you are able to claim may be reduced to a lesser amount if your adjusted gross income is in excess of a certain amount, which varies depending on your filing status - for Married Filing Joint, the adjusted gross income amount where your child tax credit begins to be limited is $110,000, there is a worksheet in the 1040 instructions that will help you calculate the limitation amount, if it applies to you. The Child Tax Credit is a nonrefundable tax credit. Nonrefundable credits will generally not make your tax refund larger than the amount of income taxes that you have paid through withholding or estimated payments.

Additional Child Tax Credit - A portion of the child tax credit is refundable for certain taxpayers that do not receive the full amount of the Child Tax Credit. If this is applicable to you, complete form 8812 to determine if you are entitled to a refundable portion of the credit. Full explanations of the computation of the refundable portion is a bit complicated, and beyond the scope of this guide, please see the 1040 instructions and IRS Publication 972 for more.

Child and Dependent Care Credit - Taxpayers can claim a nonrefundable tax credit for a percentage of their dependent care expenses that enables them to work. Maximum qualifying expenses for the child and dependent care credit is $3,000 for taxpayers with one qualifying child and $6,000 for taxpayers with two or more qualifying children. The credit is a percentage of dependent care expenses that ranges from 20% to 35%, depending on your income. The credit percentage decreases as the amount of income increases.

For a married filing joint tax return, both parents must have earned income to take the child and dependent care credit (there is an exception if one parent is a full-time student or disabled). Qualifying expenses for the child and dependent care credit include day care, nursery school, nanny and other costs. The child and dependent care credit is claimed using tax form 2441. There are more details in the 1040 instructions  and IRS Publication 503.

Tax Deductions/Income Exclusions for Adoptive Parents

Tax deductions and income exclusions reduce the amount of taxable income.

Dependency Exemption - A parent can generally claim their child as a dependent on their income tax return. For 2010, this will reduce your taxable income by $3,650 per child. Generally, the dependency exemption is granted to the taxpayer who provides greater than 50% of the child's support during the tax year. If you take custody of a child that was born in a year prior to 2010 past the midpoint of the year, it is possible that the birth or foster parents could be entitled to the dependency exemption for the year for that child. This is something that you should discuss with your adoption attorney when you are working on finalizing your adoption. If you have questions about whether an individual is your dependent, see IRS Publication 929.

Adoption Benefit Exclusion - If your employer provides adoption benefits, you may be able to exclude the up to $13,170 per child of the amount received from taxable income. Much like the Adoption Credit, the amount of exclusion is based upon the amount of qualifying adoption expenses paid. Both the Adoption Credit and Adoption Benefit Exclusion may be claimed for the same adoption (using tax form 8839); however both cannot be claimed for the same expense.

About the Author:

William E. Lincoln, CPA is a tax manager with Cottrill Arbutina and the adoptive father of three children. With more than 15 years of experience in the field, he is a key member of the firm's Tax Group, serving a clientele of closely held businesses in Western Pennsylvania. He provides a variety of tax planning services and business consulting to a "who's who" of high net worth business leaders, professionals and entrepreneurs in Beaver County. Among Bill's accomplishments have been counseling investment partnerships, using unique tax attributes as an estate planning tool to transfer wealth from one generation to another. Contact him by telephone at 724.683.3406 or by email at wlincoln@cottrillarbutina.com.

Return to Article Index