Adoption Tax Credit 2023

Please pardon any errors, this is an automated transcript.
Dawn Davenport  0:00  
Welcome everyone to creating a family talk about foster adoptive and kinship care. I'm Dawn Davenport. I am the host of the show as well as the director of creating a family.org. This is our annual adoption tax credit show. So this would be the adoption tax credit for adoptions in 2023. Our guest today to talk about the adoption tax credit, our Becky Wilmoth. She is an enrolled agent and Adoption Tax Credit Specialist with Bill's Tax Service. We also have Josh Kroll, he is with Families Rising, which is formerly NACAC, and he is their adoption subsidy Resource Center Coordinator. So welcome, Josh, and Becky, to creating a family's annual adoption tax credit show. Thanks, Darren. Thank you. All right. So Josh, what is the adoption tax credit going to be the amount dollar amount for adoption is being claimed on 2023 federal taxes, the

Josh Kroll  1:03  
maximum amount of the adoption tax credit as well as the maximum out for the exclusion? Is 15,950. For 2023.

Dawn Davenport  1:14  
All right, so $15,950 as a credit, and Becky, using the word credit here, what is a credit? And we get this question all the time, there's confusion between what a credit is, and what a deduction or some other form of tax savings is. So we know we've got almost 16,000, so $15,950 in a credit, so what is a credit? And how does it differ? A

Becky Wilmoth  1:41  
credit when you're talking about a tax credit, it is actually what helps cover your tax liability, you know, years ago, you would go to the tax book, and you would find your taxable income, you'd go across the line is that is what the IRS says, is the amount of tax that you should pay on your income. Well, that credit helps pay that. And the difference between the two deduction and a credit, a deduction lowers your income, which in turn lowers

Dawn Davenport  2:16  
your tax liability, but not direct one on one. No, no, exactly.

Becky Wilmoth  2:21  
It's kind of a chain reaction thing. But the actual tax credit is what lowers or helps wipe out your tax before it gets to your withholding or any other refundable credits.

Dawn Davenport  2:35  
Well, let's go ahead and talk about that. Because another confusion that we have is they say, Well, I get a tax refund every year, so I don't really pay taxes. So how would I even use and adoption tax credit? So Becky, how would you answer that? Well,

Becky Wilmoth  2:51  
a lot of people think that, like you said, just because they have a refund that they don't have tax. And that is not the case most of the time. Most of the time, you know, the difference between your tax liability and your withholding is what you get as a refund. And so you may still have tax that you have, and you can use that credit to help cover that tax. And so the good thing about the credit is, is also since depending on what your tax liability is, and it may change from year to year. So if you don't use it all that year, you can carry it forward to the next year. That is one of the benefits of the credit. So that's why it's such an amazing credit. And so if you look on your last year's return, that will help you see what your actual tax liability was.

Dawn Davenport  3:47  
And what people need to know is if out of your paycheck, there is money when there likely is being withheld to pay taxes. That is your money, you are paying taxes through that withholding. And if you get a refund if somebody's withheld more than your tax liability is but you still paid it out of your money. And the credit. The adoption tax credit would be lowering the amount of taxes you actually have to pay. So if you have if you don't adjust your withholdings, it means you would get a bigger refund. Right.

Josh Kroll  4:18  
The folksy short way to explain it is like it'd be like saying I went and bought a candy bar from the gas station. I gave them a $5 bill they gave me $4 back. So it was free and it wasn't free. per dollar. Right? Yeah,

Becky Wilmoth  4:32  
I like that. Yeah, I

Dawn Davenport  4:33  
do too. That's a good way. That's a good way to explain it. So, Josh, if you don't have any federal tax liability, should you still apply the credit to your federal income taxes? Yes,

Josh Kroll  4:46  
most people don't really know if they have federal tax liability. And as Becky just mentioned, they can look at last year's taxes that would be on line 18 of their 1040 to see what their tax liability is. But there's two reasons to still find file for it even if you have zero tax liability. One is it does have five additional years a total of six years of carry forward. And there are efforts to make it refundable and the current bills that would make it refundable would make the carry forward refundable also. So if Congress were to pass in 2020, for a law that would make it refundable, and you adopted in 2023, you still have to claim that in the year you finalize the adoption, there are some other timing issues for private domestic, we'll get into later, I'm sure, but you should still claim it because it'll make things easier if it later becomes refundable, or your income goes up or there's other things that change so that you can use that credit in a later carry forward er, and

Dawn Davenport  5:45  
we're going to talk about refundable and the advocacy efforts at the end that are going to try to make it refundable. We'll talk we will come back to that. So Josh, what type of adoptions are either included or excluded from the Federal adoption tax credit?

Josh Kroll  6:01  
So private domestic from foster care, international adoptions are included? Adopting your spouse's child what people typically called stepparent, adoptions is specifically excluded. And I know you're going to answer this question in a second. embryo adoptions are not included either,

Dawn Davenport  6:21  
right? What about same sex partner, second parent adoptions?

Josh Kroll  6:25  
If they're married, which it's legal for them to be married, then it's adopting their spouses child? If they're not married than not? Same with non same sex couples? It's all about the marriage. Okay,

Dawn Davenport  6:38  
so and this seems backwards to me. But if you're married, you don't get to claim the tax credit. If you are not married, you do get to claim did I get that? Right? If

Josh Kroll  6:47  
I'm adopting my spouse's child, I don't get to claim it. If we're partners but not married, I would be able to claim it.

Dawn Davenport  6:56  
Right. Okay. So talk about a marriage penalty there. You got one very go. All right. Becky, can you get credit for each adopted you complete? Even if completed in the same year, you've adopted two children and I say two separate adoptions, but they happen in the same year? What happens to the credit there? Do you get twice? Or do you only get one split between the two?

Becky Wilmoth  7:17  
It is per child, if you adopt two, you would absolutely get two of the adoption tax credit to us. And even if they are different types of adoption, you would still qualify, as long as you meet all of the other criteria you would absolutely qualify for per child. And

Dawn Davenport  7:37  
that includes adopting siblings.

Josh Kroll  7:39  
Yes, it includes adopting siblings. And if you are one of those families that adopt more than three, and I'm not sure how the software deal with it, but you do extra forms for the first, like 1011 lines on the form. So sometimes, I've run into situations the form used to have two kids on it, and people thought, oh, I can only claim two kids. But the instructions are very clear. You just keep doing as many forms as you need to list all the children you've adopted that year.

Dawn Davenport  8:06  
Correct. Okay. Thank you What is a qualified adoption expense for purposes of the adoption tax credit? For those being claimed in 2023, the

Becky Wilmoth  8:15  
IRS considers qualified expenses to be any necessary and reasonable expense for the purpose of the adoption. So any and all related directly related to the adoption, that could be adoption fees, legal fees, court costs, travelling expenses, and then of course, like for international, you know, you would need dossiers and, and you know, all those things, so anything that is necessary, including some international orphanages require that, for example, the family have a cell phone in country that is specifically for the orphanage only, and so that would absolutely be a necessary and reasonable expense. And normally siblings travel is not a qualified expense. However, a lot of agencies and orphanages require that any siblings also travel with them. So there again, that is a necessary and reasonable expense. The only thing that is not a qualified expense is birthmother expenses, and that is because it violates federal law, to claim living expenses to be deducted for federal tax purposes. So that's why it's important to have that itemized list from your agencies, what the expenses were, when they were paid, and how they were paid.

Dawn Davenport  9:51  
And generally speaking, with domestic infant adoption, you're going to have plenty of qualified adoption expenses. So you don't need to have the birth moms expensive early expectant moms expenses at that point? Correct. I want to send out a warm thank you to our listeners that are returning this week, and also to welcome the newbies. Welcome aboard. We're glad to have you. Your recommendations for this podcast to your friends is one of the best ways actually it is the best way to help us get the word out about what creating a family.org does. Please help us spread the word about this podcast so we can continue to do what we do for the adoption, foster care and kinship community. Thanks and also telephoned. Okay, Josh, now we're getting down to the when can you claim the adoption tax credit? And I'm going to give you four different types of adoptions that I want to know. Because the adoption tax credit does vary dependent, not the amount but the when you can claim it, the logistics are a little different. So let's start with domestic infant private adoptions. When can you claim the adoption tax credit?

Josh Kroll  11:05  
This is the one that people miss the most often, for private domestic infant adoptions, expenses can be claimed either the year it's final, or if it's not final, the year after the expenses were paid. So if it's taken me multiple years with a private domestic adoption, let's say I just got matched with an expectant mother today. And I'm going to finalize that adoption in 2024. But I paid that private agency my first fees in 2022. Those expenses I paid in 2022. I can claim on my 2023 tax return. If I finalized in 2024. I will claim any expenses paid in 23. And and 24. On my 24 taxes.

Dawn Davenport  11:52  
Got it. And I think you're right, that is the one that people overlook, it seems like the most All right, how about international

Josh Kroll  12:01  
adoption. For international adoptions, it does need to be final, there is some flexibility that Becky probably can talk more about than I can on safe harbors. And when it's considered final, unlike private domestic infant adoption, it cannot be claimed prior to it being final. And that can be final in country. Some states require families to do an adoption in the US afterwards. And the reason you might depending on the rules with the Safe Harbor that Becky knows more about than I do, I'm sure there might be issues if your income is higher, that you might be running into the upper limits on the income, so that one year might be more beneficial to take than another year. Okay, Becky,

Dawn Davenport  12:48  
anything you want to add to that?

Becky Wilmoth  12:49  
I do. One of the things that is important is if you are going to readopt after an international adoption, you have up to two years to do that adoption, the RE adoption. And so it's very important to note that because as you know, you know, in the last couple of years, especially with trying to get it refundable again, they have increased the maximum amount of the adoption tax credit, more so than they normally do. So it is jumping, you know quite a bit larger now. So if you are going to readopt, you have up to two years. So just as an example, you know, for 2022, the maximum amount was 14,890. And the exclusion amount was 14 894 23 that we are talking about today is 15,009 50 for the credit and 15 950 for the exclusion, well, for 2024. It is going to be 16,810 for the credit and for the exclusion. So as you can see, I mean there is quite a bit of difference. You know, if you're going to wait that two years, the advantage for the income exclusion or the credit is $1,920 more that you will be able to claim, if you know that you're going to readopt because of the international rules that you're allowed up to two years, because you know, international adoptions, you are going to have generally more than way enough, more than enough to cover you know, the income exclusion and for the credit. So if you're going to readopt Why not wait, and you have that two year timeframe. And you're talking another $1,920 credit, but

Josh Kroll  14:46  
couldn't if they had that extra I mean, I get the point generally what you're making there, but if they had extra expenses for the readopt they could claim those after finalization and have the new higher cap of available to them.

Becky Wilmoth  15:00  
Right. And a lot of it just depends on the income, because people's income change, you know, their tax liability changes. So I mean, all of those are yes, they are kind of moving parts that they can take the difference on the following year. But it really and truly, most people obviously want to claim when it's the best to advantage of them. And they should, they should absolutely, you know, look at both sides of it and see, what year is it going to benefit them the most? Do they want to wait? Or do they want to go ahead and claim what they can claim now and then take the difference in the following years? That's something that they would, you know, decide, but you have to decide if the real adoption is going to take place? And use that other credit, being

Dawn Davenport  15:46  
strategic? It sounds like yes, absolutely. Yeah, it might work.

Josh Kroll  15:50  
And the other point on that also is not only does the amount go up, but also the parts where it starts to phase out. So you know, if you're a higher income family over 200, but less than 300,000, you might be able to use more of it by delaying as the income phase out as starts at a higher income each and every year.

Dawn Davenport  16:11  
Absolutely. Yeah, that's another thing. That's a good point. That's

Becky Wilmoth  16:14  
why the tax planning of it really helps, because of the income phase out ranges. And because it, you know, is increasing, the amount of the credit is increasing more now than it had in the past. And so with those two factors, you know, it's something to think about when you know that there is that possibility that you're going to have to re adopt. All

Dawn Davenport  16:37  
right, Josh, what about foster care adoption? When can you claim the adoption tax credit,

Josh Kroll  16:42  
we're talking about adopting from the US foster care system, it's a domestic adoption. And if you did have out of pocket expenses, the timing would look the same as in the first example that I mentioned about the year after you paid them. However, most families adopted from the foster care have little to no out of pocket expenses. And so what happens is most of them, probably 80 90% are considered special needs. And if it's considered special needs and not tied to expenses, then it's only claimed in the year that it's finalized.

Dawn Davenport  17:17  
Gotcha. Um, we're going to talk specifically about foster care adoption. In just a minute. I want to pause here to tell you about our new podcast, it's called weekend wisdom. And as the name implies, it drops on the weekend. It's different from this podcast. This is a long form podcast where we interview an expert every week, when we can wisdom, we answer your questions, which let me pause here to say, please send us your questions, you can send them to info at creating a family.org If you think about it, we can wisdom in the subject line and it will automatically get to me. And we will answer your question on air. It is a short form, meaning we'll try to do it in five to 10 minutes. I'm really loving this new format. So make sure you check it out and send us your questions. So how does the adoption tax credit work with kinship adoptions? In Josh, I'll throw this to you. And what if the child was never involved with the foster care system and a grandparent or an aunt or uncle adopts the child? Does that change anything? The fact that you are related to the child,

Josh Kroll  18:28  
it really doesn't change anything, it's either going to be tied to expenses, or if the child was formerly in the foster care system or some rare examples, particularly if a child has significant disabilities and receives SSI. But if the child receives basically what's called adoption assistance, they don't have to have expenses to claim the full credit. So for relatives that pre existing relationship to the child because it's not their spouse's child, does it matter that's the only really disqualifies? It's the point

Dawn Davenport  19:01  
that I wanted? Yeah, yeah. Okay, just because you are a cousin and aunt or a grandparent, to the child or sibling, or sibling. Yeah, does not exclude you from applying for the adoption tax credit. And I can't tell you the number. We do a lot of work in the area of kinship. And I can't tell you the number of people who adopted and had not been told about the adoption tax credit.

Becky Wilmoth  19:25  
I have a lot of families, aunts, uncles, grandparents, you know, have adopted and as you said, they were not informed, right, that they qualified for the amount of the expenses that they paid out for that adoption. So that's why we all do what we do. Yeah,

Dawn Davenport  19:42  
I think ash were saying it so often. How could they not get it but they're not in the adoption world. They're not doing their homework ahead of time. They're stepping forward because there's a need. Yeah, correct.

Josh Kroll  19:53  
And the hard part is some of those especially the the older grandparents, some of them may not be working in this credit currently. because it's not refundable may not be much assistance to them. Yep,

Dawn Davenport  20:03  
that's, that's actually a very good point. But it's worth checking

Josh Kroll  20:07  
out. You know, the most important thing with all of this is follow up and checkout because we don't want anyone to miss out on this benefit. Absolutely.

Dawn Davenport  20:15  
Yes. Always ask questions we have the problem is it's easier said than done. You don't know who to ask the question to because you don't know it exists. So you don't know to ask about it. And if your child's caseworker or adoption worker, doesn't tell you, you don't know. Right? So anyway, okay. Josh, I promised you the opportunity to speak to Special Needs adoptions. First of all, I think you've already alluded to this. But how does that tie in to adoptions from foster care for let's talk about special needs adoptions and how the adoption tax credit differs. So

Josh Kroll  20:48  
when the law was written, originally Special Needs adoption had a higher rate, there was 6005 1000 for non Special Needs adoptions. When the law changed to 10,000 amount with a cost of living started in 2002. provision was added that special needs adoptions don't have to have qualified adoption expenses, if it's considered special needs, they get to qualify for the full amount of the credit, regardless of what they paid out of pocket, even if they paid nothing for the adoption, which is really common in foster care. And one of the things in qualified adoption expenses are they don't count our expenses reimbursed by another source. And so in adoption from foster care, sometimes families might have to get an attorney, but that might be reimbursed by the state. So that cost is not even really a true cost to them. So what special needs means what the IRS interprets it to me is do you get adoption assistance from the state has the state provided adoption assistance to you? And it's got to have one of these three components, either a monetary payment, what people call adoption assistance, or adoption subsidy per diem stipend, everybody's different language, or for any Washington listeners adoption support, Medicaid, or whatever cute name your state has for Medicaid in the adoption assistance agreement, or the reimbursement of non recurring adoption expenses the family has to for that child or for however many children they're claiming is dependent, you know, as adoption tax credit for, they have to have an adoption assistance agreement that provides one of those three benefits.

Dawn Davenport  22:35  
Okay, so many children who are adopted internationally, have what we call special needs something about the child that is going to make parenting that child more costly, more difficult additional training or something along those lines. So what about children adopted internationally, that have medical or emotional needs, by

Josh Kroll  22:57  
statute international are not allowed to be special needs? Because there's a provision in there about US citizen or resident at the time of the adoption beginning. So that doesn't come up the big confusion that folks who may adopt private domestically, not from foster care or internationally and have a child with some disabilities is they think there's something else that special needs gets them and all it does is qualify for the full amount. And a lot of those folks are already have expenses more than that. So there's no, generally they're not missing out. And for private, domestic adoptions without that adoption assistance. There was a case that happened in Florida, where a child met the state's definition of special needs to qualify for adoption assistance that actually went to tax court. The family lost the key language and the IRS got more explicit in the instructions after this. Savannah has been around for 25 years. The key word was the state has determined. And so really, the determination is made when the state is entering into an adoption assistance agreement, just meeting, the state's laundry list of what qualifies as special needs is not enough. It's the act of determination. And then the granting of that benefit through the adoption assistance agreement. That's what the IRS is very clear on is considered proof of special needs.

Dawn Davenport  24:25  
Okay. Yeah. But as you point out, if you're doing a private adoption of a child with special needs, chances are good, you're going to have enough qualified adoption expenses, that it's something of a moot point as far as it's going to be a wash. Some

Josh Kroll  24:39  
places might charge lesser fees, but then you have what the fees you paid are and you're still square, you know, with what you paid out. Well,

Dawn Davenport  24:46  
that's straight up. Okay. All right, Becky, can you reclaim your expenses for an attempted adoption that did not result in a placement? And if so, how do we go about this?

Becky Wilmoth  24:58  
Yes, you Can if you have a failed adoption, or, as Josh was talking about earlier, the expenses have been paid. And it's still not final, you have to wait till the following year? Well, it is the same rules for an attempted failed adoption. So for example, if you had an adoption and you paid those expenses, in 2022, you could not take them until your 2023 tax return. And you would use the same form that you use for an adoption, that's final, the form 8839, you use that same form. And in the name area, you just put not final and some have put failed, or, you know, something to those lines in that way, the IRS knows that this, you know, it is not a final adoption, it has not been completed, and it's a failed adoption or not final. And you can still claim those, but only up to the maximum amount of the adoption tax credit. And then, if you have a successful adoption, following that failed adoption, whatever credit that you received on that failed adoption, you must reduce the final completed adoption, you must reduce that amount by the amount of credit that you received on the failed adoption. What

Dawn Davenport  26:29  
if it's in a separate year? What if it's in a separate year, let's say in 2022, you had a failed placement? And then in 2023, you successfully adopted a different child? It doesn't matter that it's in a separate year? Or do you still have to reduce the amount of credit by however much you got the width for the failed adoption? Well,

Becky Wilmoth  26:50  
what would happen is the Spence's would be combined.

Dawn Davenport  26:54  
Gotcha. Okay, which is the same that you would reduce the second time around, you have to take into account that you've also already received some of the credit.

Josh Kroll  27:03  
And I do want to clarify received sounds like what you used in their credit. And it's really the amount that you claimed in the credit, correct.

Dawn Davenport  27:11  
Okay. That's a good distinction. I hear your distinction. Yes. All right, that makes sense.

Becky Wilmoth  27:15  
Something else I wanted to say, Don, back when we were talking about foster care, you know, most of the time, they don't have expenses. And so, you know, with the special needs declaration, they qualify for the full amount of that credit with no expenses. And occasionally, there are families who have some expenses, you know, it's going to be more advantage to them, obviously, to take the maximum amount rather than what they paid out. But something that they need to take into consideration that some of the state credits are for expenses, and not for foster or for special needs, declarations or the foster care system. Most of the states all have different criteria, you know, if they have some type of adoption, credit, or income exclusion. So if the child qualifies for the Federal adoption tax credit, because they are foster care, special needs, they qualify for the full amount on the federal but that state is say it's only for expenses, you could still claim the expenses on the state level that you actually paid out of pocket, and still take advantage of that state credit, even though they don't have a special needs declaration, but you had actual out of pocket expenses that were not reimbursed. Now, if they were reimbursed, obviously, you can't take the credit or whatever for that. But if you had some expenses that qualify on the state level, you want definitely want to check into if your state has a state credit or income exclusion or whatever. And take advantage of that state at the state level as well. It's just it will be for say, for the few expenses that you had, versus the federal, you know, you're going to take advantage of the full amount of the credit because you

Dawn Davenport  29:06  
have to show anything, because you're going to get because

Becky Wilmoth  29:08  
that's the more advantageous and you qualify for the full amount. Gotcha.

Dawn Davenport  29:12  
Yeah. Okay, Josh, what income level are modified adjusted gross income is what I specifically mean, is excluded from claiming the adoption tax credit in 2023. So

Josh Kroll  29:24  
there's a phase out range. So we'll start with the beginning. Everything below this amount, you qualify for the full amount income doesn't lower the amount. So in 2023, the amount is $239,231. If you're below that, there is no reduction in the amount of credit that you're claiming happening for the next 40,000 up to 279,230. You start getting a partial so if I, let's say my out of pocket expenses were 10,000 ollars That's what I'm claiming. And I'm add to, let's say, 259 230. That's halfway in between that 10,000. And credit that I claimed, I will only because I'm high income, I will only be able to access 5000 and actual credit available on my taxes when it starts doing all that math.

Dawn Davenport  30:21  
Gotcha. Okay, so there's a phase out. So, Becky, I think it was you or Josh, one mentioned at the beginning, that you're able, you don't have to take the credit all in one year. And we call that carryover. How long can the adoption tax credit be carried over? Whatever

Becky Wilmoth  30:38  
you do not use the first year that you claim, the adoption tax credit is carried to the next year. So for example, since the 15,009 50, is the maximum amount just to keep the numbers clean, let's say you used 5950, on your 2023, to cover your tax liability, that 10,000 would be carried to the next year. And you can carry it forward for up to five years after the initial year of claiming the credit. Or until it's gone, whichever comes first.

Josh Kroll  31:14  
It's like Thanksgiving leftovers. You do it until they go bad. Or they're all gone from the frigerator after six and finally, it's I mean, National Adoption Month is November, I've been using that exact for 20 years. So

Dawn Davenport  31:29  
I like it a problem with that example, is there's at least one in my family who is tired of it after the first meal. Well, that kid is out of luck. I'm just going to point out but I do hear a lot. Oh, do we have to have this again? And I went why? Yes, you do.

Josh Kroll  31:47  
The one thing I will add in because I don't know if Becky gets this or you ever get this, people talk about trying to stretch it out is over the full six years here. That's not how taxes really work. You have to use as much as you can in any given year. And that might mean you're all done in your one or you know, in year three. And when people say this, it's like you don't know what the future holds, especially post COVID. Like, you could be long term COVID And like, not be working anymore. And you couldn't use this, you want to use up as much as this credit as quickly as you can. And that's what all the forms software do as they make you use it up as quickly as you can and

Dawn Davenport  32:27  
take the money you didn't pay and your federal taxes and sock it away in some type of investment. It would be better for you in the long run. Absolutely. I

Becky Wilmoth  32:35  
agree wholeheartedly with that. The other thing you also need to consider is you have to carry that credit forward yourself.

Dawn Davenport  32:46  
What do you mean by that

Becky Wilmoth  32:47  
on your tax return each year, the IRS is not going to just automatically carry it forward for you. You have to carry it forward on your tax return yourself each year. Because if you forget to carry it forward, the only way to go back is to go back and amend that return. And even if you have zero tax liability, I know Josh has talked about it. But I have a lot of people say well, I don't have any tax liability. Or my person said I couldn't use it. It wouldn't do me any good. Listen, take it anyway. Even if you have that zero tax liability, because number one, you want to carry it forward in case it becomes refundable again, but also each person's tax situation can change from year to year. So you absolutely want to make sure that if you have carry forward that you carry it forward each year, you know, and obviously you want to use as much as possible each year. And that's another reason why we're trying to get it refundable again, because there are things that it does not cover when it's non refundable, versus when it is refundable. So it's just one of those things that you have to make sure you follow the steps through

Josh Kroll  34:01  
the big one that she's referring to that it doesn't cover, and it's probably good to put it out there is self employment taxes. That is an other tax that's added back in afterwards. That's probably the biggest one right, Becky? Yes,

Becky Wilmoth  34:13  
sir. It is. And so many people, especially in the last three years because of our economy, a lot of people have what we call went into the gig economy. They're self employed now. And so we're before they were a W two employee. Now so many more people are self employed. So it doesn't cover self employment tax. Of course, you know, first time homebuyer payback, you know, that's all gone after this year. But the other issue has always been people would take out some money out of their retirement to help you know, finish up their adoption. And when it's non refundable, it would not cover that 10% penalty of early withdrawal if you're under 59 and a half. Now the cue Bode qual provide birth or adoption, retirement distribution, you can take up to 5000. And your your spouse can take up to 5000. Without the penalty, the year that the adoption is final or if you have a birth, you still have to pay the tax on it. But you don't have that penalty because of cube owed. And when it's refundable, those things are all covered. And so that's, you know, one of the big reasons we are such strong advocates for it to become refundable again. Yeah.

Dawn Davenport  35:30  
And say again, what the acronym cube Stanford's because I think people need to hear

Becky Wilmoth  35:34  
it. Qualified birth or adoption distribution. Gotcha.

Dawn Davenport  35:38  
Josh, Becky mentioned, amending the previous year's tax return. We've talked about people either not knowing about the adoption tax credit or being told that it was not applicable, and then to find out afterwards, that, in fact, it would have made sense for them to have applied. So can you amend your previous year's tax return to include the adoption tax credit?

Josh Kroll  36:03  
Yes, you can to get a refund, you can go back as far as 2020. tax year, you can't get a refund more than three years APA beyond three years, it's closed year. So 2020, taxes were due April 15, of 2021. Three years later, is April 15. of 2024. If you did an extension, it's up to the date of that if you filed early, it's up to April 15 of 24. If you adopted in 2018, or 2019, or 27, you know, a couple years earlier than that, you can't get a refund in those earlier years, but you can amend it, you use up whatever credit you could have, you lose that you don't get a refund for it. But if you have any carry forward coming into the 2020 tax here, it might be worth doing. But it also totally might not be worth doing depending on your situation. So before anybody does that, they really need to talk to someone, I'm happy to talk to folks and see if it's worth doing the work. Because a lot of times it isn't and people shouldn't be spending money if they're not going to get any benefits out of it.

Dawn Davenport  37:09  
Sure. There's no reason for that. Okay. We are so grateful to Becky and Josh for this annual conversation. It is practical information that you can apply and actually hopefully save you money. If you appreciate this content, you will be happy to know we also have free courses sponsored by our partners, the jockey being Family Foundation, we have a library of courses that are available to you generally on parenting issues. So it's great for if you're currently parenting, you can find them at Bitly slash J B S support that's bi T dot L y slash j, b f support. Alright, here's another question that comes up almost every year. And that is, what should you do if the child's social security number is unavailable? When you get ready to file for taxes? Because this is a new child coming into your family. And the child may not have a social security number. Josh, what are people supposed to do? Because you'd normally have to put the show security number on your taxes to get any benefit from having a child.

Josh Kroll  38:19  
Becky, I know you'll have some comments on this. But I'll give my two cents, there's two different issues that I see. So the first one in the example you gave where there may not be a social security number yet is if they're going to try and take advantage under current law of the Child Tax Credit, which is $2,000, they need to file an extension and really work to get that social security number before they file their taxes. It's not as big of an issue for the adoption tax credit. But to access the $2,000 child tax credit, you need to have a social security number. Otherwise, you'll get the other dependent credit of only $500. There are a tins and items, Becky probably can tell you more about those than I can. The other thing that we've had come up because I do a lot of adoptions for foster care. A lot of those codes already have social security numbers, but the name or the number are going to change. And what we have learned from folks in IRS processing is you file with what the social security number or the Social Security ministration has on that child. So let's say I adopted a child today. And I'm working on getting the new birth certificate and getting the paperwork so I can update so scared number, but I'm not going to be done by April 15. And I'm going to file before April 15. So I will put in what the Social Care Administration has for their name and number now, and then if I've carried forward and for 2020 for taxes, and I've changed that with social care administration, I'll put in the new number then or name whatever the current information, the social care Mission has, what the IRS has told us is they have constant access to that. Usually within two or three weeks, anything that's updated Social Security ministration, the IRS has, and they can see the changes that happen. So always just for adoption, especially for older kids from foster care, just go with what is known already. And then if it changes just file under that new information, later years, and it's not a problem, but Becky probably knows more about the A 10 And I 10 that I do. Okay,

Dawn Davenport  40:28  
Becky, I was just going to ask you in a 10 stands for adoption, taxpayer identification number. All right. So Becky, yeah, anything you want to add? Yes,

Becky Wilmoth  40:37  
that's where I totally want to 100% agree with everything you said, Josh, because there are times that people have got in the A 10. Because they were under the impression that it was the same thing as a social security number. And it is not, because with a 10, you only call like you said, you only qualify for the $500 other dependent credit, and you can use it for the adoption tax credit. But I very strongly advise that if you can wait to file an extension, wait on that social security card. And particularly when you have Josh mentioned the older children, and sometimes some social security offices won't change the number, but they will change the name on the social security card for that child, because there are so many things tied up with that social security number. But if you know multiple people have had that social security number, obviously, I would absolutely try to get the name and the number changed. And there's times that just go into a different office makes a difference on that.

Dawn Davenport  41:40  
I'm glad you said that. I've heard that so often it is it's very true. It doesn't seem to be a firmly written rule. Yes,

Josh Kroll  41:47  
they used to have firm rules, and they've disappeared. And I've never found what their new rules are, if they exist. So

Becky Wilmoth  41:53  
interesting, right. And always before it was basically if they were a certain age, and yeah, it's it cannot be found anywhere in writing. And so I have advised clients just and it's the same way, when you're dealing with agents, you know, go to a different agent, call a different agent, call back again. And the other thing is, if they're an older child, and you absolutely cannot get the number changed, get an identity protection pin, Josh and I had this email discussion earlier this week. But I have clients that you know, they have tried and tried and tried, they got the name changed, but they couldn't get the number changed. And people that shouldn't be claiming their child, keep claiming their child. And so every year, their return has to go paper, instead of being able to electronically file because someone has already claimed that child. So get that identity protection pin on irs.gov. And that way someone can not electronically file their return, unless they have that pin number that is attached to that child's social security number. The other thing is, if you are going to file a return and you you need to file that extension, once you have that child's and you have to use their old name and their old social security number, because you're not going to get it in time. And you don't want to file the extension. As Josh said, use the old name and the old social security number that they have on record that the Social Security Administration has on record, then after you get your refunds, then go change the name and the number at Social Security Administration. Because otherwise, you're going to have to file an extension. And I mean, that's wonderful. I mean, if you want to wait, but if you have to, you have to. So I mean, those are just things that you need to consider. But definitely if it's an older child, and they will not change the number, go to irs.gov and get an identity protection pin. Okay,

Dawn Davenport  43:54  
good suggestion. excellent suggestion. So, Becky, how does the adoption tax credit work in conjunction with employee adoption benefits? There are some wonderful employers out there who provide adoption benefits. So how does the adoption tax credit work in conjunction with that, as

Becky Wilmoth  44:12  
long as you have enough expenses to cover them, and then it's the same on for foster care special needs. Adoption is the maximum the credit and the maximum amount of the exclusion. The income exclusion for the foster care just works a little bit different and you kind of got to know how to work your way around the forms and stuff. But what happens is if you have an employer that has a qualified adoption benefit program, it doesn't cost the employer anything. The caveat is they have to offer it to all employees and the income exclusion or if they just offer a grant. As long as you have enough expenses to cover there. It is not taxable and it goes on your W two and box 12 with code t okay.

Dawn Davenport  44:59  
And this may be obvious and we've kind of skipped over it. But I want to make it clear. Josh, if you adopt, can you still claim the Child Tax Credit? Yes,

Josh Kroll  45:10  
yes, there's zero interaction between the two. Yeah,

Dawn Davenport  45:15  
they're just two separate credits. And it doesn't matter how the child becomes yours, you can still get the child tax credit. It does matter. Of course, for the adoption.

Josh Kroll  45:23  
20 years ago, the support test for claiming kids is dependent was harder for families who get adoption subsidy to qualify for that. Also, just to really clarify, it's super confusing. The employer benefits they call adoption assistance. And that's also what they call often what the benefits that come for special needs kids adopted from foster care, they are not the same, even though they use the same term. So what Yeah, yeah,

Dawn Davenport  45:50  
yeah. Why do they do that? Yes. Okay. Becky, do you need to send the IRS any documentation for the adoption tax credit when you file your taxes? And if so, what type are either way whether you need to send it what type of documentation to do? Keep in your record, so two questions.

Becky Wilmoth  46:06  
Thankfully, the adoption tax credit can now be electronically filed. So you do not have to send your documentation and whenever you file your tax return, however, if they send you a letter, don't panic. These are the things that you just need to put in an envelope, I highly recommend you just get an envelope and mark the IRS. And in the event that the IRS would request more documentation, after you file your return for foster care, it is the final judgment of adoption and the subsidy agreement. And both of those need to be signed and dated by the approving authorities. And for private, domestic depends on if it's final or not. If they requested more documents, it would just be for the expenses. But if it's final, you would need a copy of all of your qualified expenses. And again, the final judgment of adoption. But like I said, thankfully, now the form 8839 can be electronically filed and no documentation needs to be sent in with a return. But

Dawn Davenport  47:13  
keep the documentation in a file so that if you need to show it at some point, you can

Becky Wilmoth  47:19  
absolutely the

Josh Kroll  47:20  
other thing I'll just say on this issue for expenses for private domestic or international and international can vary depending on Hague or non Hague countries. But for like the proof of the adoption, generally a translated final judgment decree from the country will work. But also some of the different visas could too. But for the expense part. Don't sweat the small stuff, if you get over the total amount of the credit, or if you have an employer thing and the total amount of the credit and whatever you got an employer benefits. Do that. Like if you've got a smudgy receipt from like a dumpling shop in China or something for $7 in are the equivalent of $7. But you're already at 30,000. You can let that go. You know, airfare agency fees, lawyers, those are going to be your big expenses. Yeah, once you get over, don't sweat all those other little receipts? Absolutely.

Dawn Davenport  48:14  
You're not going to get any money back for them. Exactly.

Becky Wilmoth  48:16  
Yeah. It's not worth the stress. Amen. All right.

Dawn Davenport  48:20  
So I'm going to start ask both of you this question. But Becky, how do you find a tax specialist knowledgeable about the adoption tax credit, we've all heard stories of people either filling out their own tax forms are going to somebody who doesn't know anything and being given incorrect information? How do you find a tax specialist knowledgeable about it? And does it have to be somebody in your state?

Becky Wilmoth  48:45  
It does not have to be someone in your state. The first most important thing is don't ever be afraid to ask questions. Does that person know how to file the adoption tax credit? Does that person know the ins and the outs? Do they know how to deal with the IRS in the event that your return goes under review? Or you know, just don't be afraid to ask questions. And always, always go on to the IRS directory and see if they are even licensed with the IRS whether it's an enrolled agent because an enrolled agent is licensed for all 50 states and then with their a CPA or if there are AFSP, which is a lower designation, you know, with the IRS, just make sure they are number one reputable. Don't be afraid to ask questions that they know what they're doing, and that they're on the IRS directory, and they know how to respond to the IRS. And I know there are people that do their own return and everything goes great and that's wonderful. But they have complicated you know, other issues as well. And that's why One of the reasons it's very important to use someone that's reputable that knows what they're doing that they're on the IRS directory, because there's a lot of places that do them that are not qualified, obviously. And we do all 50 states, we are enrolled agents, which is the highest license you can get with the IRS. Enrolled Agents are licensed for all 50 states to do tax returns, and represent clients for all 50 states. And what happens when you get some of the people that are not qualified. They are not licensed to represent you in front of the IRS. And so then you are basically on your own. And so you can talk to the IRS and deal with the situations. Don't panic, but just absolutely find someone that knows what they're doing. And don't ever be afraid to ask questions.

Dawn Davenport  50:48  
Josh, is there a list anywhere that you know of as well? I

Josh Kroll  50:52  
don't know of a list. I am not a tax professional. Unlike Becky, the two things that I hear from families from time to time that give me some caution, because my focus is more on adoption from the foster care system. So special needs, sometimes tax repairs, don't believe you can get this credit without expenses. And even when presented with the information straight from the instructions, some won't listen. And I would say shop around in that case. I don't know if this is common or not Becky, I hear it in for me. It seems like a warning signs. But I hear some families report that some tax repairs, will charge them money to research, the adoption credit beyond the actual fees of doing their taxes. And I don't know if that's a common occurrence or not. But that always seems like a maybe shop around sort of situation. I would

Becky Wilmoth  51:47  
definitely shop around. If a tax preparer says that to you that I'm going to charge you to research this. You need to go somewhere else. Okay,

Josh Kroll  51:56  
good. I'm glad. I wasn't sure. But it just always seemed wrong to me. So yes. Okay. Good to know that.

Dawn Davenport  52:04  
And Josh, somebody has specific questions, especially about the special needs, you mentioned that you could answer them. Or you may be able to you're not a tax specialist, but do you want to give out your email? Or would you want them just to contact families rising?

Josh Kroll  52:17  
They'll get to me anyways, but currently, my email is Josh KJOSH K at NASDAQ NAC a c.org. And my phone number I take calls to is 800-470-6665. And my direct extension is 115. Excellent.

Dawn Davenport  52:40  
Okay. And the last thing I promised and I'll throw this to you, Josh, can you make a plug for how to advocate for refundability? Yep,

Josh Kroll  52:48  
just had a call on it this morning. There are two bills out there. The easiest way for our family to advocate for it right now is to go to adoption tax credit.org. We are part of that group. There's a really easy way if you go under take action to contact Congress, one of the menu items, you can very easily contact your US Representative and your two US senators, and just ask them to co sponsor the bill or to thank them for being sponsors of it. The bills are in the Senate. It's s 2895 in the house. It's H R 3662. And that's the easiest way to push it right now. I think the Senate has 14 co sponsors. And the House has sadly only 19. The Senate has 100 members the house has 435. So the Senate is doing much better right now who are co sponsors of the bill.

Dawn Davenport  53:45  
Excellent. Thank you so much. And thank you very much Becky Wilmoth and Josh Crowe for being with us today to talk about the adoption tax credit for 2023

Transcribed by https://otter.ai