Clarifying the Adoption Tax Credit and Special Needs Children

February 25, 2011

Since publishing my recent post regarding The Adoption Tax Credit and Special Needs Children we have received numerous comments and emails asking for clarification. More specifically, most inquiries are related to what evidence is required to prove that a determination of special needs has been made by the state when taxpayers are claiming the adoption tax credit on their 2010 tax return. This issue has arisen because, in many cases where a child would otherwise fit the definition of a special needs child, the adoptive parent has nothing from the state indicating that a determination has been made. 

Section 39C of the Internal Revenue Code, which governs the adoption credit, explicitly requires the determination of special needs to come from the state. To be sure, the instructions to IRS Form 8839 (the form that is required to be attached to your 1040 in order to claim the adoption credit) is also very clear that the determination must come from the state. The instructions require the taxpayer to “. . . attach a copy of the state determination of special needs to your income tax return.” The instructions further state that “[a] special needs determination must include information establishing that the state has made a determination of special needs for the eligible child”. Unfortunately, at this point, the IRS has not issued any further guidance on this question.

As a result, any determination or description of special needs from private agencies or local municipal authorities that are not linked to the appropriate state agency will not be sufficient. Therein lies the bad news. If the taxpayer does not have the determination from the state, they cannot automatically receive the full amount of the adoption credit.

However, you may be able to take advantage of the tax credit by doing some additional work. Even without a determination of special needs, taxpayers can still claim the credit based on the actual qualified expenses they incurred. Such expenses include adoption fees, attorney fees and court costs directly related to the adoption, travel expenses including meals and lodging while away from home, and re-adoption expenses related to the adoption of a foreign child. Thus, if taxpayers are able to substantiate those expenses, they may be able to claim the full amount of the credit without a state determination of special needs.

If you would prefer to avoid the hassle of gathering detailed expenses, some investigation could be carried out to determine if it is necessary to do so. First, it would be best to double check with the agency or organization through which the adoption was facilitated. They may have a state determination in their files. In addition, if the determination you have is from a County Assistance Office, that will likely suffice because those are sub-offices of the Pennsylvania Department of Public Welfare. 

Additionally, adoptions from a county’s Children and Youth Agency should also suffice. This is because a special needs declaration from the state, usually through the Statewide Adoption and Permanency Network (SWAN), is a prerequisite for a child to be placed under a Children and Youth Agency’s care. If your adoption was of that type, a call to the Children and Youth Agency through which you made the adoption is warranted. Likewise, if you receive adoption assistance or adoption subsidy assistance from the state or even a private agency, they may also be able to provide you with proof of a state determination because such a determination is generally required before the assistance is authorized.

Over the coming year, we will monitor the Internal Revenue Service to see if they offer any more guidance with regards to this issue, so please check back.

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