Adoption Credit
Adoptive parents can claim a tax credit for certain eligible adoption expenses or exclude from income employer-provided adoption assistance if the employer maintains an adoption assistance program. The credit and exclusion are subject to a dollar limitation and phase-out for taxpayers whose income exceeds certain thresholds. This summary is a basic explanation of complex rules intended to provide basic background knowledge, and should not be relied upon for any specific situation without advising a tax professional… fortunately, we happen to have one of those “on staff”. If you need to know how these rules could apply to your situation and cannot afford consultation with a quality CPA, please contact us ( info@knowntome.net ). We will have to ask you to disclose copies of your previous year’s tax returns and to answer questions about anticipated future income and other personal matters. But we can help you understand how the credit might help you make adoption financially feasible.

Amount of Credit
For 2008, taxpayers can claim a credit for adoption expenses up to $12,150 [$10,000 plus an inflation amount]. The $12,150 limitation applies to the adoption of each eligible child and is cumulative over all tax years. When applying the limitation, adoption expenses incurred in an unsuccessful attempt to adopt an eligible child are included with those of the first subsequent successful adoption. Married couples must file a joint return to claim the credit.

Domestic Special Needs Adoptions Adoptions involving a domestic child with special needs that becomes final is $12,150 regardless of the actual amount of qualifying adoption expenses incurred. An special needs child must be under the age of 18 or incapable of caring for himself or herself and must meet two additional requirements: (1) a state has determined that (a) the child cannot or should not be returned to the parents’ home, and (b) it is reasonable to conclude that the child cannot be placed with adoptive parents without adoption assistance because of a specific factor or condition (e.g., ethnic background, age, mental condition, handicap); and (2) the child is a citizen or resident of the U.S.

Expenses of Failed Adoptions Adoption expenses relating to a child who is a citizen or resident of the U.S. are eligible for the credit, even if the adoption is not finalized. However, adoption expenses relating to a noncitizen, nonresident child do not qualify for the credit if the adoption fails. Similarly, only actual expenses in a failed adoption of a domestic special needs child are allowed for purposes of the credit (rather than the automatic $12,150 noted above).

When an Adoption is Considered Final For purposes of the credit, a domestic adoption is considered to be final when state law considers the child legally adopted. Adoptions of foreign-born children for which the Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption, and The Intercountry Adoption Act of 2000 (IAA) apply are final when the Hague Convention and IAA determine finality. For all other foreign adoptions, the adoption is considered final when a competent legal authority in the foreign country enters a decree of adoption and the child receives an IR visa from the U.S. State Dept., or the year in which a home state court enters a decree of re-adoption (the parents can choose either date).

Eligible Expenses Adoption expenses eligible for the credit include any reasonable and necessary expenses, including adoption fees, court costs, attorney fees, and travel expenses (including transportation, meals and lodging while away from home) paid in relation to the legal adoption of an eligible child. Adoption expenses incurred for the adoption of a spouse’s child or reimbursed under an employer program do not qualify for the credit. Parents should maintain detailed records of their adoption-related expenses to ensure treatment as qualified adoption expenses. This includes receipts, cancelled checks, invoices, trip diaries, calendars, documentation of conversations with lawyers and caseworkers, etc.

High Income Phase-Out For 2009, the adoption credit begins to phase out when a taxpayer’s adjusted gross income (AGI) exceeds $182,180. The credit is completely phased-out at AGI of $222,180 and is reduced prorata between $182,180 and $222,180. The phase-out is the same for each filing status except married filing separate, in which case a credit generally cannot be claimed. Any credit phased-out under these rules is lost, and may not be carried forward to future years.

Credit Limited to Tax and Carryforward The amount allowed as an adoption credit in any tax year is only allowed to offset parents’ entire regular tax liability and AMT tax liability. Any credit in excess of regular and AMT tax liability is carried forward and used up to the same limits for five additional tax years. The high income phase-out discussed previously is applied only to the original year of the credit. It is not reapplied in future years to a credit that has been carried over.

Additional information is available at www.irs.gov. Search the IRS site for the term “Adoption Credit” to locate current documents and IRS guidance.

It truly is dangerous to apply general information to specific situations due to the complexity in the tax law. Do not rely on this information without professional assistance in applying it to your specific situation.