When you are in the process of adopting, it seems like there is always another bill to be paid. Travel expenses, home study fees, court costs, and more keep piling up.
The IRS offers an adoption tax credit to make adoption more affordable and to hopefully allow families to adopt who might not be able to afford to do so. You can qualify for a refund of your qualified adoption expenses via a tax credit of up to $13,360 per child in 2011 and $12,170 (adjusted for inflation) in 2012. Taxpayers may be able to qualify for the full tax credit even if the adoption is not finalized in 2011 or 2012. Moreover, taxpayers may also qualify for this tax credit without qualified expenses if the child is a special needs child.
What Expenses Qualify to be Included in the Tax Credit?
The amount of your tax credit is calculated by adding up all the “reasonable and necessary” expenses you incurred during the course of the adoption. This includes court costs, traveling expenses (including meals eaten away from home while traveling), the birth mother’s health costs, attorney fees, and foreign adoption fees.
Exceptions to the Adoption Tax Credit
You can’t take the adoption tax credit if you are adopting your spouse’s child or participating in surrogate parenting. You also can’t include any amounts that your employer paid, either directly to you or on your behalf, to assist with the adoption. (However, you will not have to pay taxes on those amounts.) Another important exclusion is that if you are attempting to adopt internationally and the adoption does not go through, you cannot deduct those expenses. However, if the foreign adoption of one child does not go through but you do successfully adopt another child, you can deduct all of the expenses for both adoption attempts, up to the credit limits.
When Do I Claim the Adoption Credit for 2011 or 2012?
Since many adoptions can span more than one year, it’s important to keep good records of when expenses were paid and when the adoption became final. The rules are different for domestic and foreign adoptions.
For domestic adoptions, if you incur the expense in the year when the adoption becomes final, you can use the expense towards your adoption tax credit in that year. If the expense is incurred in a year before the adoption becomes final, you can use it the year after it is incurred.
For foreign adoptions, you must wait to use your adoption tax credit until the year that the adoption becomes final. Then, you can use all of the expenses you have incurred up to that point for the adoption tax credit in that year. If you incur any expenses in the years after the adoption becomes final, you can use them towards the tax credit in the same year as they were incurred.
How Much Can I Get Back with the Adoption Tax Credit?
In 2011, the tax credit is refundable, which means you can get the credit even if you don’t pay as much as the credit in taxes. In 2012, it is non-refundable and is reduced.
A tax credit reduces your tax bill dollar-for-dollar, so if you have a tax bill of $5,000 and an adoption tax credit of $4,000, your tax bill will be reduced to just $1,000. Remember that your tax bill is what you owe for the whole year, and you have probably already paid a large portion of the tax bill through paycheck withholding. The adoption tax credit is also a refundable tax credit, meaning that even if the tax credit is more than your tax bill, you will get back the extra. That is, if your tax bill is $5,000 and your adoption tax credit is worth $7,000, you would still get the extra $2,000 in your pocket! This is an extremely valuable tax credit, so it’s important to keep good records of all of your adoption expenses so you can get back the most money possible.
For 2011, the limit on the adoption tax credit is $13,360 per child. For 2012, the limit is $12,650. If you are adopting multiple children at once, you can take one tax credit per child. However, if your income is high, you may not be able to get the full tax credit. In 2011, the credit begins to phase out at a modified adjusted gross income (MAGI) of $185,210 or more, and you won’t be able to claim it at all if your MAGI is $225,210 or more. In 2012, the credit starts to be reduced with a MAGI of $189,710 and phases out completely at $229,710.
How Do I Claim the Adoption Tax Credit?
The form you will need to complete is Form 8839, Qualified Adoption Expenses. This can be complex, especially if the adoption effort spanned more than one year or included more than one child, so you may benefit from seeking professional help to complete this form. Make sure to keep excellent records of your adoption expenses, with receipts whenever possible and as much documentation as you can get.
If your expenses were more than $13,360 per child for 2011, you still may be able to get a tax credit on the expenses over the limit. The unused expenses will be “carried over” to the next year, and you will be able to claim an additional amount of adoption tax credit in the next year.
If you are married, you may not be able to claim the adoption tax credit if you file as married filing separately except in special circumstances. Most married couples will only be able to claim the adoption tax credit if they file jointly.
Raising children is expensive enough on its own, so make sure that you get all the tax benefits you deserve when you go the extra mile of adopting a child. The adoption tax credit is a great way to make adopting more affordable.