Giving “Special” Credit To Adoptive Grandparents

Several weeks ago I had the honor of speaking at a meeting of RAPP, Relatives as Parents Program.  RAPP is a support group for the growing number of grandparents who are raising their grandchildren.  According to AARP, more than 2.5 million U.S. children are currently being raised by their grandparents.

What is behind this trend?  Unfortunately, an increasing number of grandparents are raising their grandchildren because the parental rights of their own children have been severed by the state, largely due to abuse and/or neglect.  Many have legally adopted their grandchildren, some many years ago, and are not aware of the fact that these children have been certified as children with “special needs” (a phrase which has nothing to do with any form of physical, emotional or learning disability). 

This is why I was visiting the RAPP meeting – to share some major changes made to the Adoption Tax Credit for 2010 and 2011, changes that have resulted in tax refunds of well over $10,000 per adopted child and an unexpected financial windfall for those adopting children with “special needs.”

In today’s column I will discuss the Adoption Tax Credit and children that meet the IRS definition of “special needs.” I will also discuss the unexpected financial windfall adopting these children created for these grandparents and, finally, why time is running out on claiming the credit. 

The Adoption Credit reimburses adoptive parents of eligible children for qualified adoption expenses up to specified limits.  For those adopting “special needs” children, however, the full credit amount is available for each child regardless of any expenses paid by the adoptive parents.

Prior to 2010, the Adoption Credit was “nonrefundable” – meaning it would reduce tax liability but would not generate a refund.  Although any unused credit could be carried forward, it was lost if not used within five years.  Because the credit was not refundable, many adoptive parents saw little benefit and did not claim the credit or carry it forward. 

The Changes:  For 2010 and 2011 ONLY, the Adoption Tax Credit was made refundable - adoptive parents can receive the credit even if they owe no income tax.  This refund-ability also applies to any credit carried over to 2010 from a previous tax year.  The amount of the credit was $10,630 per adoptive child in 2005, an amount that increased each year to reach $13,360 for 2011. 

The Adoption Credit and “Special Needs” Children: To qualify for the credit/exclusion, the adoptive child must be an “Eligible Child” or a “Special Needs Child.”  An “eligible child” is either under the age of 18 or a person physically or mentally unable to take care of his or herself.  A “special needs child,” is defined as an eligible child who meets three additional criteria: (1) The Child is a citizen or a resident of the United States or U.S. possession. (2) A state agency must determine that the child should not or cannot be returned to their parent’s home.  (3) The state must also determine that a specific factor (such as the child’s age, ethnic background, medical condition or handicap) makes adoption unlikely without assistance.  If your child qualifies as special needs child it should be clearly stated in the “Adoption Agreement” received from the state.

Window closing to claim credit:  If you overlooked the Adoption Credit on your original return the only way to claim it now is to amend the adoption-year’s return and all years required to carry the credit forward to 2010.  Since the adoption credit can be carried forward five years, adoptions of special needs children from 2005 and forward can still qualify for refunds in 2010. 

Unfortunately, however, the window of time is closing to claim the Adoption Credit.  Taxpayers only have three years from a return’s due date to claim a refund.  This means that the ability for most to carry forward and claim the Adoption Credit on 2010’s income tax return will only be available until April 15, 2014. 

In today’s column, I have discussed a potential financial windfall for those adopting “special needs” children from 2005 to 2011.  I have not discussed many of the credit’s complexities that may impact your return.  As always, do not rely on this information as a basis to make any financial decisions.  Feel free to contact our office to consult with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.