Is Money From Social Security For An Adopted Child Considered Income

Adoptive parents often enquire whether adoption assistance (adoption subsidy) payments are taxable. Many also wonder about challenge their child as a dependent and using the child tax credit. NACAC reviewed related IRS publications, and below nosotros offer our interpretation of these issues. Please know that NACAC is not a tax expert, and these opinions should not be considered legal or financial advice. Y'all should consult your own tax advisor before filing.

Adoption Assist Payments equally Taxable Income

Since 1974, the IRS has ruled that adoptive parents do not need to include adoption assist benefits in their taxable income (see box below for specific IRS language).

IRS Publication 17: Your Federal Income Tax

Publication 17 has made 2 references related to the taxability of adoption assistance: Chapter 12: Other Income—Welfare and Other Public Assistance states "exercise not include in income the benefit payments from a public welfare fund" (p. 84). In 1974, the IRS ruled that adoption assistance benefits were public welfare payments and thus exempt from taxation under this clause. In a previous version of Publication 17, the IRS specifically stated "do non include in your income payments from a state bureau to assist you care for your adopted kid" (p. 67 of the 1986 Publication 17).

Challenge Your Child As A Dependent

The following information is from IRS Publication 501: Exemptions, Standard Deduction, and Filing Information. The IRS recognizes that an adopted kid is like any other child—"An adopted child is always treated as your kid. The term 'adopted child' includes a kid who was lawfully placed with you for legal adoption." However, a child can be claimed as a dependent only when all five of the conditions described in the nautical chart below are met.

Category	To claim a child as a dependent, the kid must:
Relationship	be your son, daughter, stepchild, eligible foster child*, or a descendant (for instance, your grandchild) of any of them, or be your brother, sis, half brother, half sis, stepbrother, stepsister, or a descendant (for instance, your niece or nephew) of any of them (*An eligible foster child is an individual placed with you by an authorized placement agency or by judgment, decree, or other social club of whatsoever court of competent jurisdiction.
Age	be under the historic period of nineteen at the end of the twelvemonth, be a full-time pupil under historic period 24 at the end of the yr, or be permanently and totally disabled at whatever time during the year, regardless of historic period
Residency	have lived with y'all for more than half of the yr (At that place are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents. There is no specific exception for adoption.)
Back up	not take provided more than half of his or her own back up during the year
Special Test for Qualifying Child of More than I Person	not be claimed past a dependent by anyone else (The IRS has a specific test for children who might be claimed by more than one person, such as divorcing parents. Please meet Publication 501 if yous demand more information.)

Both the residency and support rulings changed for tax year 2005 and beyond. One will arrive more difficult for adoptive parents to claim children equally their dependents, the other will brand it easier.

To encounter the current residency requirements, an adopted child would take to alive with the adoptive family for at to the lowest degree half the year, or for kid born during the year more than than half the yr they are alive. Before 2005, a child placed with you for adoption whatsoever fourth dimension during the tax year (including on December 31) would meet the residency requirement.

The support exam changed in a fashion that is more helpful for adoptive parents whose children receive adoption assist. Now, a parent is considered to have met the back up test unless the adopted child provides more than half of his or her own support. Adoption assistance payments are considered back up from the state, non the child, then they do non factor into this criteria. In the past, parents had to provide more than half of all support for the child.

Qualifying for the Child Tax Credit

Most families who can claim a child as a dependent every bit described to a higher place should too be able to claim the child tax credit. This credit is in addition to the adoption revenue enhancement credit, the credit for child and dependent intendance expenses, and the earned income tax credit.

Again, the IRS recognizes adopted children equally the same as other legal children. To qualify for the child tax credit, a child must meet all of the following five criteria. The kid must meet all of the following criteria:

• be your child (including foster child) or sibling, or a descendant of your kid or sibling  (for example, your grandchild)
• take been nether age 17 at the end of the year
• not provide over half of his or her own back up for the agenda year
• have lived with y'all for more than half of the calendar year
• be a U.S. denizen, a U.South. national, or a resident of the Us (If you are a U.S. denizen or U.Due south. national and your adopted kid lived with y'all all year, that child meets this condition.)

The maximum amount y'all can claim for the credit is $ii,000 for each qualifying child. Families who are claiming both the adoption taxation credit and the child tax credit will need to complete a worksheet in IRS Publication 972: Child Revenue enhancement Credit to decide the specific corporeality of the credit. (If you checked Yes on Line 16 of the worksheet, you may be eligible to take the additional child tax credit, which is a refundable tax credit. To merits this credit you volition need to complete Form 8812, Additional Child Taxation Credit.) Most other families tin complete a worksheet in the 1040 instructions to determine the amount of the credit.

Source: https://nacac.org/resource/tax-related-adoption-assistance/

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