Q: What are the tax benefits and expenses when adopting a child?
A: There are two tax benefits available to offset the expenses of adopting a child. For 2011, you may be able to claim a refundable credit against their federal tax for up to $13,360 ($13,170 for 2010) of “qualified adoption expenses” (see below) for each adopted child. The credit is reduced (phased out) if your income exceeds certain limits (see discussion below).
Qualified adoption expenses. To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child” (defined below).
Qualified adoption expenses don't include expenses connected with the adoption of a child of a taxpayer's spouse, expenses of carrying out a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a federal, state, or local program. Expenses that are reimbursed by an employer don't qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.
Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e., one in which the child isn't a U.S. citizen or resident) qualify only if the child is actually adopted.
Taxpayers who adopt a child with special needs will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $13,360 for 2011 ($13,170 for 2010). They can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $13,360 for 2011 ($13,170 for 2010) of actual expenses.
Eligible child. An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. A child who turned 18 during the year is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for his or her self is also eligible, regardless of age.
Special needs child. This refers to a child who the state has determined cannot or should not be returned to his parents and who can't be reasonably placed with adoptive parents without assistance because of a specific factor or condition, e.g., ethnic background, age, membership in a minority group, medical condition, or handicap. Only a child who is a citizen or resident of the U.S. can qualify as having special needs.
When to claim the credit or take the exclusion. If the qualifying expenses are paid before the year the adoption becomes final, the credit is claimed for the year after the one in which the expenses are paid. If the expenses are paid in the year the adoption becomes final or in a later year, the credit is claimed for the year in which the expenses are paid. For example, say $3,000 was paid in 2009, $2,000 in 2010, and $4,000 in 2011, when the adoption becomes final. The taxpayer claims a $3,000 credit in 2010 (for the 2009 expenses). The $2,000 of 2010 expenses and the $4,000 of 2011 expenses are combined to be claimed in 2011. In the case of a foreign adoption, the credit may not be taken until the year in which the adoption becomes final.
Adoption credit is refundable. The adoption credit is a refundable credit. So, if the sum of your refundable credits (including any adoption credit) exceeds your tax liability, the excess amount is an overpayment that can be refunded to you.
Phase out for high-income taxpayers. The credit allowable for 2011 is phased out for taxpayers with adjusted gross income (AGI) over $185,210 and is eliminated when AGI reaches $225,210. (For 2010, the phase-out begins at $182,520 and is completed at $222,520.) The 2011 credit is reduced by a percentage equal to the excess of AGI over $185,210 divided by $40,000. (For 2010, the credit is reduced by a percentage equal to the excess of AGI over $182,520 divided by $40,000). For example, say taxpayers who could otherwise claim a $2,000 credit have an AGI of $195,210 in 2011. Their $195,210 AGI minus $185,210 equals $10,000, and $10,000 divided by $40,000 is 25%. Accordingly, the taxpayers “lose” 25% of their credit ($2,000 times 25% is $500) and can only claim a credit of $1,500. (Special rules for determining AGI apply in some cases.) The phase out rules for high-AGI taxpayers apply for the exclusion as well.
Child's taxpayer identification number required for credit or exclusion. The IRS can disallow the credit and the exclusion if a valid taxpayer identification number (TIN) for the child if not included on the return.
Adopted child may qualify for dependency deduction, other tax benefits. Your legally adopted child will qualify as your dependent if the other dependency tests are met, e.g., you provide more than half of the child's support. Even if the adoption isn't yet final, the child will be your dependent if he or she was placed with you for legal adoption by an authorized placement agency and was a member of your household for at least part of the year. Special requirements apply to adoptions of foreign children who aren't U.S. citizens or residents. Once the child is your dependent, you will qualify for the dependency deduction and for other tax benefits, such as the child tax credit.
I can help you to make sure that you get the full benefit of the substantial tax savings available to adoptive parents.
Larry Kopsa, CPA
A: There are two tax benefits available to offset the expenses of adopting a child. For 2011, you may be able to claim a refundable credit against their federal tax for up to $13,360 ($13,170 for 2010) of “qualified adoption expenses” (see below) for each adopted child. The credit is reduced (phased out) if your income exceeds certain limits (see discussion below).
Qualified adoption expenses. To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child” (defined below).
Qualified adoption expenses don't include expenses connected with the adoption of a child of a taxpayer's spouse, expenses of carrying out a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a federal, state, or local program. Expenses that are reimbursed by an employer don't qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.
Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e., one in which the child isn't a U.S. citizen or resident) qualify only if the child is actually adopted.
Taxpayers who adopt a child with special needs will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $13,360 for 2011 ($13,170 for 2010). They can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $13,360 for 2011 ($13,170 for 2010) of actual expenses.
Eligible child. An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. A child who turned 18 during the year is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for his or her self is also eligible, regardless of age.
Special needs child. This refers to a child who the state has determined cannot or should not be returned to his parents and who can't be reasonably placed with adoptive parents without assistance because of a specific factor or condition, e.g., ethnic background, age, membership in a minority group, medical condition, or handicap. Only a child who is a citizen or resident of the U.S. can qualify as having special needs.
When to claim the credit or take the exclusion. If the qualifying expenses are paid before the year the adoption becomes final, the credit is claimed for the year after the one in which the expenses are paid. If the expenses are paid in the year the adoption becomes final or in a later year, the credit is claimed for the year in which the expenses are paid. For example, say $3,000 was paid in 2009, $2,000 in 2010, and $4,000 in 2011, when the adoption becomes final. The taxpayer claims a $3,000 credit in 2010 (for the 2009 expenses). The $2,000 of 2010 expenses and the $4,000 of 2011 expenses are combined to be claimed in 2011. In the case of a foreign adoption, the credit may not be taken until the year in which the adoption becomes final.
Adoption credit is refundable. The adoption credit is a refundable credit. So, if the sum of your refundable credits (including any adoption credit) exceeds your tax liability, the excess amount is an overpayment that can be refunded to you.
Phase out for high-income taxpayers. The credit allowable for 2011 is phased out for taxpayers with adjusted gross income (AGI) over $185,210 and is eliminated when AGI reaches $225,210. (For 2010, the phase-out begins at $182,520 and is completed at $222,520.) The 2011 credit is reduced by a percentage equal to the excess of AGI over $185,210 divided by $40,000. (For 2010, the credit is reduced by a percentage equal to the excess of AGI over $182,520 divided by $40,000). For example, say taxpayers who could otherwise claim a $2,000 credit have an AGI of $195,210 in 2011. Their $195,210 AGI minus $185,210 equals $10,000, and $10,000 divided by $40,000 is 25%. Accordingly, the taxpayers “lose” 25% of their credit ($2,000 times 25% is $500) and can only claim a credit of $1,500. (Special rules for determining AGI apply in some cases.) The phase out rules for high-AGI taxpayers apply for the exclusion as well.
Child's taxpayer identification number required for credit or exclusion. The IRS can disallow the credit and the exclusion if a valid taxpayer identification number (TIN) for the child if not included on the return.
Adopted child may qualify for dependency deduction, other tax benefits. Your legally adopted child will qualify as your dependent if the other dependency tests are met, e.g., you provide more than half of the child's support. Even if the adoption isn't yet final, the child will be your dependent if he or she was placed with you for legal adoption by an authorized placement agency and was a member of your household for at least part of the year. Special requirements apply to adoptions of foreign children who aren't U.S. citizens or residents. Once the child is your dependent, you will qualify for the dependency deduction and for other tax benefits, such as the child tax credit.
I can help you to make sure that you get the full benefit of the substantial tax savings available to adoptive parents.
Larry Kopsa, CPA
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