Several United States Senators recently introduced the “Adoption Tax Credit Refundability Act”, which aims to make the entirety of a family’s adoption expenses refundable via a tax credit. Now why is this relevant?
The maximum amount you can claim for an adoption tax credit, in addition to any other tax credits, is limited to your tax liability. The remainder, however, can be carried forward for up to five (5) years. See IRS Topic No. 607 for details. By changing the tax credit so it is refundable, you can claim all adoption expenses in the calendar year in which they occurred.
Absolutely this is a good thing. I applaud this bill and hope it goes through, as it’ll make the tax credit easier to claim.
But let’s not lie to ourselves about it either.
There is an oft-repeated notion that tax credits and deductions make something more affordable. And Senator Blunt’s press release perpetuates that fallacy with its headline: “Blunt, Casey, Inhofe Introduce Bill to Make Adoption More Affordable for Families”. And also with this statement from the press release’s first paragram: “Making the tax credit fully refundable will ensure that more families can benefit from this critical support.”
Again this perpetuates the oft-repeated fallacy that tax credits (and deductions) aid affordability. They don’t. On Facebook I made this analogy: “This is about like a friend saying they’ll help you buy a car by reimbursing part of what you paid up front several months later.” And back in 2013 I wrote an article about several tax breaks in which I pointed out the catch-22:
Taxes are always going to be a financial catch-22, because reducing your tax burden almost always requires you taking on a major expense or reducing your take-home pay – i.e. the only realistic and legal means of reducing your tax burden involves you giving up money.
Adopting or giving birth to a child comes with plenty of tax benefits. You can adjust your W-4 withholding following the adoption or birth, reducing how much money comes out of your paycheck for Federal and State taxes. You may even be able to adjust your Federal W-4 withholding to declare yourself exempt from Federal income taxes (as opposed to FICA taxes) for the rest of the calendar year, depending on how much you had to pay out. I wonder how many who adopt actually consider doing this. Make sure to read through the IRS publications and do the math with your paystubs before you actually do this, though, to make sure you can actually do that.
Plus you get to claim the child as a dependent for the whole year even if the adoption was only finalized in December. Marriage works the same way, something that worked very well to mine and my wife’s advantage (read: big tax refund!) when we married in December 2011.
But the tax benefits only occur after you’ve shelled out who-knows-how-much money to adopt the child, meaning they do not and cannot make the process more affordable. Again, it is analogous to a friend or family member saying they’ll help you out by reimbursing part of your out-of-pocket expenses after you’ve already incurred them.
If our representatives really wanted to make adoption more affordable, they would find ways of addressing the up-front cost rather than acting like a tax credit you can only get after the adoption is finalized is somehow making it more affordable.
Which one way to make it more affordable is allowing the IRS to loan money to taxpayers to cover qualifying adoption expenses that can be repaid with the fully-refundable adoption tax credit. That addresses the up-front cost while still providing for the offset in tax liability the credit already provides. The taxpayer gets all of the benefit of the tax credit without having to wait months or even a year or more (depending on when the adoption is finalized) to claim the tax credit and receive the commensurate tax refund.