September 2, 2009
In the next few weeks, we will be sharing a series of posts about the Adoption Tax Credit, written by Rob Pederson. Rob is a CPA with 11 years of experience – 4 in public accounting as an auditor and tax preparer, and 7 in the accounting departments of two publicly traded companies. He also owns and write for getyourcpa.com, a site that helps accountants pass the CPA exam and offers career advice. Find the first article in this series here.
When Can You Claim The Credit?
If you are adopting a U.S. citizen and you have incurred costs for an adoption that is not yet final, you can claim the credit for those costs in the following year. For example, if you pay adoption expenses in 2009, but the adoption is not finalized in 2009, you cannot claim the credit for 2009. Those expenses go toward the credit on your 2010 tax return. Unsuccessful adoptions should be treated this same way (e.g. expenses claimed in the year following payment).
If you are adopting a U.S. citizen and you finalize an adoption, you can claim the credit for all of your appropriate adoption expenses on that year’s tax return. For example, if you finalize an adoption in 2009, you can claim the credit for expenses you paid in 2009 and 2008 for that adoption. Any expenses prior to 2008 should have been claimed on prior year tax returns.
If you are adopting a non-US citizen, you can claim the credit only when the adoption is finalized. If the adoption is unsuccessful, you never get to take the credit for a foreign adoption. A person is considered a non-US citizen if he or she was not a US citizen at the time the adoption process began.
How Many Times Can You Claim The Credit?
The IRS is very vague on the rules about how many times you can claim the adoption credit. Specifically, the instructions to Form 8839 (the form you have to fill out to get the credit) state:
“If you made more than one attempt to adopt one eligible child, combine the amounts you spent and complete only the “Child 1” line. Do not report the additional attempt(s) on the “Child 2” line. Complete the “Child 2” line only if you adopted or tried to adopt two eligible children.
Example: You planned to adopt one child. You had one unsuccessful attempt to adopt a child and later successfully adopted a different child. Complete only the “Child 1” line because you made more than one attempt to adopt one eligible child. ”
This suggests that making one failed attempt followed by one successful attempt only qualifies for one credit ($12,150 total for both the failed and successful attempt). Some accountants do not believe this is the right way to fill out the form. They believe it is legal under the tax code to use the credit twice, for a total maximum of $24,300. I bring up this point to highlight one of the areas of the adoption tax credit that is not clear cut. This issue is one you should definitely discuss with your accountant or prospective accountant to determine how he or she will treat this situation. You also need to be sure you are comfortable with whatever decision is made since the IRS will be coming after you if they disagree.