The Adoption Tax Credit
If you have recently adopted a child, you may be eligible to claim the Adoption Tax Credit. This tax credit is provided by the federal government and it can help reduce your overall tax liability.
The original federal Adoption Tax Credit began as a provision of the Small Business Job Protection Act of 1996. Then in 2001, the Hope for Children Act increased the tax credit for qualifying adoption expenses and employer adoption assistance exclusions (to $10,000 each). Finally, in 2009, the Adoption Tax Relief Guarantee Act was proposed to permanently expand the Adoption Tax Credit.
For tax years 2010 and 2011, the Adoption Tax Credit has been revised and enhanced. While it was originally set to expire at the end of 2010, recent health care legislation extended the credit to 2011. Additionally, the Adoption Tax Credit was made “refundable” and the maximum allowable credit amount was increased (from $12,150 to $13,170).
Generally speaking, you may claim the Adoption Tax Credit if you have adopted an “eligible child” and paid “qualified adoption expenses” along the way. Since adopting is a huge financial commitment, there is a very good chance that you spent out-of-pocket money during this process.
Currently, those who adopt a child can receive a tax credit of up to $13,170 for qualified adoption expenses that were paid out-of-pocket. An “eligible child” refers to any child under age 18, or any disabled person incapable of self-care. According to the IRS, “qualified adoption expenses” include the following:
“Reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child.”
On the other hand, those adopting a child with special needs may claim the $13,170 tax credit in the year the adoption is completed, even if they do not have qualified adoption expenses.
The amount of your Adoption Tax Credit may be limited based on your modified adjusted gross income (AGI). The 2010 phase-out range for the Adoption Tax Credit is between $182,520 and $222,520 ― which is relatively high, allowing more parents to qualify. If your income falls within those thresholds, the amount of your tax credit will be reduced accordingly.
In addition to the Adoption Tax Credit, employers may provide adoption benefits to their employees as part of an “employer-sponsored benefit program.” This is included in the compensation package with other benefits, like group medical and dental programs. If your employer contributes to certain qualified adoption expenses, those amounts may be excludable from your gross income.
The Adoption Tax Credit can be filed using IRS Form 8839 (Qualified Adoption Expenses), which will help you determine the amount of credit you are eligible for. Also on this form, you must report any payments or reimbursements received from employer adoption assistance benefits. Form 8830 should be attached to your Form 1040 (U.S. Individual Income Tax Return).
The Adoption Tax Credit may apply to domestic adoptions, even if they are not finalized. But keep in mind that international adoptions must be finalized in order to qualify for this tax credit. Finalization in the United States generally differs from other countries, requiring many families to re-finalize the adoption in their state (even if it has already been finalized in the child’s birth country). It is highly recommended that families seeking the Adoption Tax Credit consult with a tax professional.
If you have adopted a child, or you plan to do so, it’s important to learn as much as you can about the federal Adoption Tax Credit.