Adoption Tax Credit

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Adoption Tax Credit

Note: The information below is strictly for informational purposes. CWA does not and cannot give financial advice. Therefore, we recommend that you consult a qualified tax and financial professional regarding your eligibility when filing for the Adoption Tax Credit.

There has been a lot of discussion about the Health Bill signed into law recently. One of the highlights of the Bill was the expansion and extension of the Adoption Tax Credit. For 2010, the maximum credit is increased to $13,170 per eligible child. This applies to all adoptions, special needs or not. In addition, the credit is now refundable, meaning that families can actually receive the full tax credit in the form of a refund, even if they owe zero taxes. The adoption tax credit increase was scheduled to terminate at the end of 2010, but is now extended to the end of 2011. It will need to be extended again if it is to run beyond 2011.

You qualify for the adoption tax credit if you adopted a child and paid out-of-pocket expenses relating to the adoption. The adoption credit is calculated on Form 8839 Qualified Adoption Expenses (PDF). You may claim an adoption credit of up to $12,150 (for tax year 2009) per eligible child. The credit is reduced based your modified adjusted gross income. The IRS provides a worksheet for figuring your modified adjusted gross income for the adoption credit in the Instructions for Line 8 of Form 8839. If your modified adjusted gross income (AGI) is more than $182,180, your credit is reduced. If your modified AGI is $222,180 or more, you cannot take the credit.

Qualified adoption expenses. Qualified adoption expenses are reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. These expenses include:

Adoption fees

Court costs

Attorney fees

Travel expenses (including amounts spent for meals and lodging) while away from home, and

Re-adoption expenses to adopt a foreign child

Nonqualified expenses. Qualified adoption expenses do not include expenses:

That violate state or federal law

For carrying out any surrogate parenting arrangement

For the adoption of your spouse's child

For which you received funds under any federal, state, or local program

Allowed as a credit or deduction under any other federal income tax rule

Paid or reimbursed by your employer or any other person or organization, or

Paid before 1997

Eligible child. The term “eligible child” means any individual:

Under 18 years old, or

Physically or mentally incapable of caring for himself or herself

Child with special needs. An eligible child is a child with special needs if all three of the following apply.

The child was a citizen or resident of the United States (including U.S. possessions) at the time the adoption process began.

A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents' home.

The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:

The child's ethnic background,
The child's age,
Whether the child is a member of a minority or sibling group, and
Whether the child has a medical condition or a physical, mental, or emotional handicap.

When to take the credit. Generally, until the adoption becomes final, you take the credit in the year after your qualified expenses were paid or incurred. If the adoption becomes final, you take the credit in the year your expenses were paid or incurred. See the Instructions for Form 8839 for more specific information on when to take the credit.

Foreign child. If the child is not a U.S. citizen or resident at the time the adoption process began, you cannot take the credit unless the adoption becomes final. You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final.

How to take the credit. To take the credit, you must complete Form 8839 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 52, and check box b on that line.