We recently received clarification from the Department of Education (ED) that the now refundable adoption tax credit is generally not reported as untaxed income on the Free Application for Federal Student Aid (FAFSA).
The 2010 tax year is the first year the adoption credit is refundable. We recently received an inquiry regarding whether the funds should be reported as untaxed income on the FAFSA. The clarification ED provided is based on how the adoption credit appears on federal tax returns. The adoption tax credit is "lumped together" with various other credits on a return, making it difficult to determine what portion of the total refundable credits is the adoption tax credit. As a result, the refunded amount is generally not reported on the FAFSA due to the difficulty of calculating the correct value to include on the application.
There is at least once scenario in which the value of the refunded adoption tax credit could be included on the FAFSA. If you have specific knowledge of the value of the credit, you should include the amount in an applicant's untaxed income. However, since the schedules which can be part of a tax return are not required for federal verification and many applicants take advantage of IRS data retrieval, it is unlikely that the financial aid office would have documentation to confirm the value of the refunded adoption tax credit.
Publication Date: 3/23/2011