Raising children can prove to be quite a financial responsibility. And families with children need to pursue every tax break and credit available to them to help their earnings stretch farther. The Federal Government helps to reduce this financial burden somewhat for families who adopt a special needs child. This action can help them apply to get a special needs adoption income tax credit that can reduce the income taxes that they owe annually.
The federal tax adoption credit for adopting a special needs child was first started in 2003, allowing a family that had adopted a special needs child to claim an adoption tax credit without documenting specific expenses. In 2009, that tax credit amount was raised from $11,650 to $12,150 per each adopted special needs child.
Just when is an adopted child considered to be eligible for a special needs adoption income tax credit? Children belonging to a minority race, children who are older than infants, children who need to stay within a sibling group, and children who suffer from any sort of mental, physical or emotional handicap requiring medical attention are all considered to be in the special needs category and eligible for income tax credit on their parents' tax return.
In order to be eligible to fill out Form 8839, called the Adoption Tax Credit Form, the government requires that the adopting family has received some sort of adoption subsidy or financial assistance from their state of residence. This subsidy helps to prove that their adopted child is in the special needs category. Anyone filling out Form 8839 should be able to answer "yes" to the following conditions: that the adopted child or children were citizens or residents of the U.S. when the adoption process was undertaken; that the state has ruled that the child or children cannot return to their birth home; and that the state has deemed that the child or children adopted would not be able to have been adopted without the foster parents receiving some sort assistance from their state of residence.
Applying for the special needs adoption income tax credit can be applied against the taxpayer's total tax liability. If an individual or couple, for example, owes $8,000 in income tax and has had $7500 withheld from their paychecks, they would still owe $500 in taxes. But by applying the special needs adoption income tax credit (up to $7,000 is allowed to be used annually), they will actually be entitled to receive $6500 of that credit back as a refund, which can be extremely helpful in paying toward the expenses incurred from day to day living, in addition to being able to carry over any unused credits over the next five years to apply toward any federal income taxes owed.
Publication 972 from the Internal Revenue Service offers additional detailed information about the process of applying for a special needs adoption tax credit. It's also helpful to get your questions answered by a competent tax attorney or your tax accountant regarding this special tax credit category.