Del DeVries : Tax Credit Adoption Special Needs Children

The North American Council on Adoptable Children defines special needs as:

Children who are harder to place for adoption—older children, children of color, sibling groups, and children with medical conditions or disabilities—are often determined to have special needs.
if a child receives adoption subsidy (assistance), the adoption subsidy agreement (or application and agreement) is evidence that the state has determined that child has special needs.

IRS instructions for Form 8839 - Qualified Adoption Expenses include the following definition of special needs (Source: Instructions for Form 8839 2006 Line 1 - Column (d) )

A child is a child with special needs if all three of the following statements are true.

1. The child was a citizen or resident of the United States or its possessions at the time the adoption process began.

2. A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home.

3. The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:

a. The child’s ethnic background and age,

b. Whether the child is a member of a minority or

c. Whether the child has a medical condition or a physical, mental, or emotional handicap.

If all 3 of the conditions above are met and If you check the box in column (d), indicating the child has special needs, be sure to keep evidence of the state’s determination in your records.

Special Needs? Based on the IRS definition, this is NOT exactly the same as what we normally think of as special needs for medical, personal, or special education care.

Filing the Adoption Credit - details and more details

Adoption Credit forms and instructions for 2006: Form 8839 / Instructions 8839
- NOTE: 2006 has been used as the oldest year that can still be amended as of early April 2010. An amended return can be filed within 3 years of the date the original return was filed or within 2 years of the date on which you paid the tax due on the return, whichever is later.
The amount of the adoption credit for a special needs child is the total credit available. Reading the instructions for Line 5 - Qualified adoption expenses, from the top of the right hand column of page 4:

... if you adopted a child with special needs and the adoption became final in 2006, enter $10,960 on line 5.

Also impacted by the Adoption Credit is the Child Tax Credit - see Publication 972 for 2006 for a detailed calculation of both credits. The Tax Almanac reports that the IRS has not followed this calculation method for the order of calculating the adoption credit and the child tax credit.
- Assuming that following the instructions is the correct method: The end result is that the Adoption Credit is taken first and if total tax is reduced to zero then the remaining adoption credit is treated as a carryforward (up to 5 years).
- Because calculating the Adoption Credit first resulted in a zero Child Credit, the next step is to complete Form 8812 to claim the Additional Child Tax Credit.
Amending a Prior Year return with TurboTax. Maybe there is a payback for paying for the software! IF the amended return process for 2006 is fairly easy, and the carryforward and amended returns for 2007 and 2008 as well. I'll check back (_2010-04-02) and give an update.

Tags: Taxes _2010-04-02

No, this is the time to give.

Marquis de Lafayette

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