EASTON, Md. — It’s tax time and many adoptive parents may be leaving money on the table.
Two weeks ago The Red Thread column was about federal tax credits, but there are also a number of states that also offer tax credits (or at least tax deductions) to offset adoption expenses.
Tax Day
I’m not a CPA, nor am I a tax attorney. I am an adoptive parent who was able to secure federal and state tax credits several years ago at a time when the credits were more meager and I know how important they were to my family.
Today, with more federal and state tax incentives applied toward adoption these tax credits are even more valuable.
Contact your own state to find out whether or not it offers tax credits or deductions for adoption expenses. While not all states do, all states should. If you learn yours is one of the majority that do not, it may be time for some calls to your state representatives to find out why not. Some states offer them some years and not others. Other states are famous for “studying” the idea of tax credits for years without actually putting them into effect.
As for those states that do offer tax credits and deductions, each one has its own rules and they can differ widely. For instance, there’s a $3,000 tax cap for deductions in Arizona, while in Oklahoma, a resident may deduct “nonrecurring adoption expenses not to exceed $20,000 per calendar year.”
In some states, the credit is refundable, meaning adoptive families whose credit balance exceeds their tax liability are eligible for a tax credit refund, as the federal government currently provides. However, far more common is for states to apply the tax credit towards current liability and have any unused credit carried forward for the next succeeding years (generally between three and seven).
Just who is eligible largely depends on things like your income, whether you itemize already or not, when the expenses are paid in relation to when the adoption becomes final, and sometimes is tied to whether you applied for a federal tax credit. For instance, in North Carolina the tax credit is equal to 50-percent of the allowable tax credit claimed on your federal return whether or not you got/are eligible for the federal tax credit.
Generally speaking, all adoptions of minors are eligible. Whether you adopt within your state or from another (or even out of the country), most states recognize all adoptions for these credits.
Many states provide larger tax benefits to residents who complete special needs adoptions. It’s very important to do some background research since each state defines “special needs” differently and can vary widely, referring to physical/emotional needs, or having adoptable siblings, or with being over a certain age.
Adoptions done through the state, primarily through the foster care system, are usually covered entirely by the state, including legal expenses and attorney’s fees. Most training, support, or assistance needed through and after these adoptions is also usually covered by the state.
Since half of all foster children are also considered special needs under some parameter, there may be extra subsidies available (depending on the state, there may be tax deductions, credits, or outright subsidies/grants.) Most helpful here is the fact that the caseworker who assists with state adoptions should have access to all the application materials and know what is considered a qualifying expense.
Income restrictions in the states are not the factor they are federally, meaning that most states award credits and deductions to residents regardless of how high their personal income is.
Budget concerns have put pressure on states to limit deductions of all stripes, including adoption tax incentives. Although a number of states have been stalwarts in ensuring these credits continue, many have tied their tax incentives to the federal government’s, which is scheduled to sunset in 2013 at which point it will either be phased out or dramatically scaled back. When that happens, many states are likely to follow its lead.
For now while these credits are there and in some cases robust, state money has been allocated and is there, waiting for adoptive parents to claim it.
Andrea is an adoptive mother and a journalist. She is at work on a book, "The Red Thread," a collection of stories told by families united through adoption. She is also owner of Media Branding International, a public relations/media consulting firm.
Read more The Red Thread: An Adoptive Family Forum in The Communities at The Washington Times.
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