Foster Parents Lose Utility of Adoption Tax Credit

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The National Foster Parent Association edited this story on January 23, 2019.  The original story, in its entirety, appears at the bottom.

My name is Josh Kroll, and I have been on the NFPA board in the past as a Region 5 advisor, and I work for the North American Council on Adoptable Children.  While I have no specific expertise in taxes (not an accountant, CPA, nor Enrolled Agent), I have been helping families with the adoption tax credit since 2004.

So this is a post to clarify what the earlier one is talking about, provide some context, and also explain how taxes actually work. 

The IRS 2018 1040 form has adjusted which credits are utilized first in reducing your tax liability. As a consequence the new and improved Child Tax Credit ($2000 total, $1400 refundable per child) is consumed before the Child Adoption Credit which is unrefundable. Foster families tend to adopt more than one child including sibling sets. Under the old tax law this was the reverse so that the adoptive parents of special needs children could harvest that credit first ($13570 per child),and still collect the refundable additional child tax credit of $1000 per child. Any unused portion of the adoption credit could be rolled over for the next 4 tax seasons (5 years).

In December 2017, Congress passed tax reform, this was the biggest change to federal taxes since 1986.  The Child Tax Credit has increased from $1,000 in 2017 to $2,000 per dependent child under the age of 17 at the end of the tax year in 2018.  The big difference that is being pointed out is how much of the Child Tax Credit can convert to the refundable Additional Child Tax Credit.  In 2017 all $1,000 of it could convert to the refundable Additional Child Tax Credit, but in 2018 only $1,400 of the $2,000 can become the refundable Additional Child Tax Credit, leaving $600 that will remain the non-refundable Child Tax Credit.  

For most people this isn’t an issue, but to cover every detail because it will impact some families, for any of the Child Tax Credit to convert to the refundable Additional Child Tax Credit, the family has to have enough Earned Income.  This is done by taking the Earned Income, usually wages, subtract $2,500 from it then multiply the result by 0.15 to figure out the maximum amount of earned income a family may have.   For example, if my Earned Income is $30,000—then I subtract $2,500 to get $27,500 and then multiply that by 0.15 to get $4,125 of Child Tax Credit that can become the refundable Child Tax Credit.  In this example, if I have two children all $2,800 that can become refundable will and $1,200 will be non-refundable.   However, if I have three children, only $4,125 can become refundable, not the full $4,200, and that means that $1,875 (not $1,800) will remain non-refundable. 

I suspect that the poster had enough Earned Income so he wasn’t aware of the dynamic of the order of which credits are used first, folks without enough earned income had Child Tax Credit take precedence before the Adoption Tax Credit in 2017 and earlier.  Since we had tax reform, now since at least $600/child will always remain as non-refundable and this will impact more families than before. 

The IRS sets the order in such a way to maximize the benefit to tax payers.  The Child Tax Credit has no carryforward provision, so it is use it or lose it, this is why it is used before the Adoption Tax Credit that can be carried forward five additional years, for a total of six years.

Under the new tax law there is no longer any tax assistance in adopting children out of the foster care system due to the new Child Tax Credit absorbing most, if not all of the tax liability. The new tax law eliminates the possibility of any refundable portion of the Child Tax Credit going back to foster parents. Leaving the majority of the Adoption Credit untouched or at best underutilized. Foster families typically do not earn enough to take advantage of the whole credit thus further diminishing its purpose and value.

It will still be able to be utilized for couples who adopt privately or from foreign countries as they have significant upfront costs.

This paragraph is just false.  Many families will still benefit from the Adoption Tax Credit, but to be clear, just like in 2017 and earlier, many families will not benefit, but this specific change isn’t the reason. 

The ability to use the Adoption Tax Credit is limited by a family’s tax liability (line 11 – 2018, line 47—2017, both years form 1040), and some families have $0 tax liability and have nothing to use the credit against.  One thing that will be a big change for families is the elimination of the Exemption which reduced the Taxable Income by $4,050 per parent and dependent, this will increase many families taxable income and also their tax liability.  So a family that had $0 tax liability in 2017, may have some in 2018 because of elimination of the Exemptions. 

There are families that adopt internationally and domestic private who do pay significant costs, but their ability to use the Adoption Tax Credit has the same dynamic as families adopting from foster care.  On average they probably make more money, but on an individual basis, there are plenty of private and international adoptions that struggle to fully utilize the adoption tax credit over the six years. 

As a foster parent for 5 years and a County Foster Parent Leader for 3 years. One of the incentives that helped the additional financial stress realized by foster parents was the utility of this credit under the old tax law. In my opinion this credit is no longer suitable for foster parents and the carry forward feature will now rarely be fully utilized within the five year window.

What do I propose?

1. Place the Child Adoption Credit back above the Child Tax Credit on Form 1040 (easiest solution), OR

2. Make the credit fully refundable again, if the Adoption credit is not moved, OR

3. Eliminate the carry forward limit of five years to “until the credit is exhausted.”

For foster families that adopt sibling groups this change could benefit them for an extended period of time.

The new tax law has revealed an unintended consequence by erasing the tax benefit to foster families. This now has made the job of States, Counties, and Foster Parent Organizations that much harder to recruit and retain foster parents. 

The Trump Administrations “America First” agenda has taken a full step back with this oversight. It makes the job tougher for families caring for America’s most vulnerable children.

Please share this with your State and local county officials, your US Senators, your US Congressman, and most important your hard working foster parents.

As discussed above, the credit can be used over six years, not just five.  Overall, I think the ability to use the credit won’t change much from the prior years to the current years for each individual family.  So many families will still benefit and sadly many still won’t. 

The adoption tax credit was refundable in 2010-2011, and in those years it helped the most families.  When a credit is refundable, meaning it counted as a payment, it was not limited by tax liability nor Earned Income.  It helped the self employed by offsetting their payroll taxes (which are added in after non-refundable credits are applied).   It makes no sense to change the order of when credits are used as this order is to the family’s best tax benefit.   An unlimited carryforward provision will help some families fully utilize the credit over time, but will do absolutely nothing for those with insufficient tax liability, like grandparents on a fixed income who adopt their grandchildren.

Personally, Josh speaking here, I don’t think that most foster, adoptive, and kinship families are looking to add to their families because of tax benefits.  A statement like that feeds into the false narrative that resource parents are into it for the money.  Some may factor it into if they financially can be a resource parent, but it only takes effect after the adoption is finalized.  If we want the adoption tax credit to be useful to the most families, not just those that have higher incomes, we should advocate to make it refundable again.  The wonderful thing about adoption is how bipartisan the support for it has been over time.  Making this credit refundable won’t be easy, but it will be the fairest change to this credit.

There will be a time to reach out to your members of Congress about making it refundable again.  There will probably be a push for that again, and once there is a bill number to advocate your member of Congress to look it, that will be the time to be the squeaky wheel.

________ The original story appears below this line ________

Originally published January 21, 2019

While doing our taxes tonight I discovered a significant change in how the Child Adoption Tax Credit is applied. 

The IRS 2018 1040 form has adjusted which credits are utilized first in reducing your tax liability. As a consequence the new and improved Child Tax Credit ($2000 total, $1400 refundable per child) is consumed before the Child Adoption Credit which is unrefundable. Foster families tend to adopt more than one child including sibling sets. Under the old tax law this was the reverse so that the adoptive parents of special needs children could harvest that credit first ($13570 per child),and still collect the refundable additional child tax credit of $1000 per child. Any unused portion of the adoption credit could be rolled over for the next 4 tax seasons (5 years).

What does this all mean?

Under the new tax law there is no longer any tax assistance in adopting children out of the foster care system due to the new Child Tax Credit absorbing most, if not all of the tax liability. The new tax law eliminates the possibility of any refundable portion of the Child Tax Credit going back to foster parents. Leaving the majority of the Adoption Credit untouched or at best underutilized. Foster families typically do not earn enough to take advantage of the whole credit thus further diminishing its purpose and value.

It will still be able to be utilized for couples who adopt privately or from foreign countries as they have significant upfront costs.

Why does this matter?

As a foster parent for 5 years and a County Foster Parent Leader for 3 years. One of the incentives that helped the additional financial stress realized by foster parents was the utility of this credit under the old tax law. In my opinion this credit is no longer suitable for foster parents and the carry forward feature will now rarely be fully utilized within the five year window.

What do I propose?

1. Place the Child Adoption Credit back above the Child Tax Credit on Form 1040 (easiest solution), OR

2. Make the credit fully refundable again, if the Adoption credit is not moved, OR

3. Eliminate the carry forward limit of five years to “until the credit is exhausted.”

For foster families that adopt sibling groups this change could benefit them for an extended period of time.

The new tax law has revealed an unintended consequence by erasing the tax benefit to foster families. This now has made the job of States, Counties, and Foster Parent Organizations that much harder to recruit and retain foster parents. 

The Trump Administrations “America First” agenda has taken a full step back with this oversight. It makes the job tougher for families caring for America’s most vulnerable children.

Please share this with your State and local county officials, your US Senators, your US Congressman, and most important your hard working foster parents.

The NFPA would like to thank Glyn Turner for bringing this to our attention.

16 Comments
  • Monica

    Reply

    This wasn’t Trump’s doing. I qualified for this tax credit several times over the past 7 years and it has never been of any benefit to our household.

  • Lin Leclair EA

    Reply

    I disagree. I am an Enrolled Agent and do several hundred adoption credits. There was a tax change for 2018 that made the child tax credit $2000 per child with $1400 of that being refundable. When you do a return it will show the $600 which is the non refundable portion of the child tax credit coming first then the adoption credit. It will leave the $1400 that is refundable last.

  • Keith

    Reply

    Hello. All my comments won’t fit into one post, so I’m going to try to post several successive comments so that you can see everything.

    —————-

    I took a look at the changes you pointed out, as I hadn’t heard about this before. Can you clarify for me how the order of the credits has changed?

  • Keith

    Reply

    I’m certainly not a tax expert, but I compared the 2017 and 2018 Form 1040s, and I couldn’t figure out how the order has changed.

  • Keith

    Reply

    On the 2017 Form 1040:
    – The child tax credit is claimed on Line 52
    – The adoption tax credit is claimed on Line 54c (taken from Form 8839)
    – The two amounts are then added together on Line 55
    – This amount is then subtracted from the tax due to eventually come to the “total tax” due

    • Keith

      (continued)
      On the 2018 Form 1040:

      – The child tax credit is claimed on Line 12a

      – The adoption tax credit is claimed on Line 12b (taken from Schedule 3, Line 54c, which is taken from Form 8839)

      – The two amounts are then added together on Line 12

      – This amount is then subtracted from the tax due to eventually come to the “total tax” due

    • Keith

      (continued)
      So it seems as if the two credits end up in the same place on each of the Form 1040s. Is there something I’m missing that creates the issue you’re raising?

      Also, two other points:

    • Keith

      1) The article states “any unused portion of the adoption credit could be rolled over for the next 4 tax seasons (5 years)”. Just to clarify, any portion of the credit that can’t be used in year 1 can be rolled over for each of the next 5 years (year 2, year 3, year 4, year 5, year 6) until used up, for a total of 6 years.

    • Keith

      2) If the issue you raise is accurate, it might be better to use less definitive language to show the credit is still plenty useful to a lot of people. For example, I don’t think it’s accurate to say “there is no longer any tax assistance in adopting children out of the foster care system” and “The new tax law eliminates the possibility of any refundable portion of the Child Tax Credit going …

    • Keith

      (continued)
      … back to foster parents”. If the issue you raise is accurate, the tax benefits certainly will be less for a lot of people, but there would also be a large amount of people who will still fully benefit from both tax credits. It just depends on each person’s income.

  • Kate

    Reply

    When I ran tax calculations on H&R Block, it applied the adoption credit, and zeroed out my liability, and then added an additional $5,600 for the refundable portion of the child tax credit. So at least for me, it appears to apply in the most beneficial order. Looking at the new 1040, this seems to follow with credits on 12, and refundable credits, including ACTC, on 17. Am I missing something?

  • Lora M Ellis

    Reply

    This is not accurate. You are directed to Pub 972 and instructed to figure out your adoption credit before figuring your child tax credit. But, with the changes to the child tax credit (it is increased to $2,000 per child, with $1,400 of that being refundable through the additional child tax credit), it takes into account that non-refundable amount of the child tax credit to preserve more of your

  • Lora

    Reply

    adoption credit for a future year.

    example: we had 7,512 left in adoption credit from 2014. Our tax liability was 7,458, which I thought would pretty much deplete the rest of the adoption credit. Instead, pub 972 had me figure out the non-refundable part of our child tax credit (we have 6 kids so 12,000

  • Lora

    Reply

    12,000 – 8,400 = 3,600) and used that towards our tax liability first. I only had to use 3,858 from the adoption credit and have 3,654 to use next year. And we can get back the full 8,400 through the additional child tax credit.

  • Josh Kroll

    Reply

    There is some truth in this piece but some misunderstandings too.

    Refundable is only solution that make sense. You would not want to use Adoption Tax Credit, which can have unused amout carryforward (by the way it is 6 total years, not 5) rather than throw away a credit that can’t be made refundable. Carry forward without a time limit would still be a disservice to those with low income

  • NFPA Communications

    Reply

    Thank you for your comments. We are currently working to update this story.

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