Familiarizing Yourself with the Adoption Tax Credit Part I

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December 5, 2011
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It’s difficult to write an “all-inclusive” article on something as complex as the adoption credit. So, as we approach the end of the tax year, you are encouraged to familiarize yourself with the adoption tax credit, its benefits and requirements as pertaining to your individual situation.

With the enactment of the Affordable Care Act the adoption credit was increased and made refundable for 2010 and 2011. A credit, unlike a deduction, is a dollar-for-dollar reduction of tax. A refundable credit means that you may qualify for a tax refund even if you did not have federal income tax withheld. Adoption credit carryforwards from 2005 through 2009 were considered refundable in 2010.

The credit for 2011 is $13,360 per child, and is the largest refundable tax credit available to individual taxpayers. Note that this amount begins a phase-out as your Modified Adjusted Gross Income reaches $185,210. Those who adopted a child in 2011 may qualify if you adopted, or attempted to adopt a child and paid qualified expenses relating to the adoption. There are many requirements that go along with that benefit, however.

  1. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of a child who is younger than 18 years old, or physically or mentally incapable of caring for him or herself. Fees such as adoption fees, court fees, attorney fees and travel, including meals and lodging while you are away from home, are considered qualified. You should keep all of your receipts.

  2. Adopting a child who is a U.S. citizen or resident, allows you to take the adoption credit or exclusion even if the adoption never became final. If you pay qualifying expenses in any year before the year the adoption becomes final, you would take the credit after the year of the payment. If paid the year the adoption becomes final, take the credit in that same year. If you have expenses that flow through any year after the year the adoption becomes final, take the credit in the year of the payment. Again, the expenses paid in an unsuccessful attempt to adopt an eligible child before finalizing the adoption of another child may qualify for the credit.

  3. If you are fortunate enough to have an employer-provided adoption assistance benefits program, you may exclude that amount from your income if the following apply: you completed an eligible adoption in 2011; you adopted a child with special needs and the adoption became final in 2011; or, you adopted an eligible foreign child in prior years and the adoption became final in 2011. You would take the exclusion from income in the year you received the benefit. However, any qualified adoption expenses reimbursed by your employer are not included in the calculation of the credit. You may be able to exclude up to the $13,360 limit from your income and also be able to claim a credit of up to $13,360, but you cannot claim both a credit and an income exclusion for the same expenses.

Check back tomorrow for part 2 of this blog!

Photo Credit

Pamela Smitson, CPA

Smitson Erhart-Graves Tax Advisors, LLC

Pamela Smitson is a Certified Public Accountant who specializes in small business and individual taxation, tax planning, and financial planning services in Central Indiana.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the United States Treasury, we inform you that any tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of 1) avoiding tax related penalties or 2) promoting, marketing or recommending to another party any transaction or tax-related matters addressed in this communication.

MLJ Adoptions is a Non-Profit, Hague-Accredited adoption service provider located in Indianapolis, Indiana, working in Africa, Eastern Europe, Latin America and the Pacific Isles. We are passionate about serving children in need.