Tax Tips
Adoption Tax Benefits - June 2001
Richard Scrivanich - Partner
Recent tax law changes now give those who are adopting a child benefits that help defray the cost of adoption. Under the new laws, adoptive parents may be eligible for a special tax credit of up to $5,000 for certain expenses incurred in adopting a child, and may be able to exclude from income up to $5,000 paid or reimbursed by an employer under an adoption assistance program. If a "special needs child" is adopted, the limit for both the credit and the exclusion is $6,000. This credit and exclusion are in addition to the general personal exemption and child tax credit available to all qualifying taxpayers with children.
Eligible children
For a child to be eligible for either the credit or exclusion, the child must be either under 18 years old or incapable of caring for himself/herself. A child is considered a "special needs child" if he or she is 1) a U.S. citizen or resident and 2) the subject of a state determination that the child should not be returned to his or her parent's home and has a condition such that he or she probably would not be adopted unless assistance is provided to the adopting parents.
Qualifying expenses
Only certain expenses qualify for the credit or exclusion. These include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the legal adoption of a child.
Expenses that do not qualify include those that violate state or federal law, are incurred in a surrogate parenting arrangement or in the adoption of a child of a spouse, are paid with government funds, or are allowed as a credit or deduction under any other federal income tax rule.
Qualifying income limit
Adoptive parents may not qualify or only partially qualify for the credit or the exclusion depending on their modified adjusted gross income (AGI). If the modified AGI is $75,000 or less, the full credit or exclusion may be taken. For modified AGI between $75,000 and 115,000, the credit or exclusion is reduced by a percentage, i.e., the amount of modified AGI that exceeds $75,000, divided by $40,000. At a modified AGI level of $115,000 or more, the credit or exclusion is eliminated.
Dollar limit for credit and exclusion
The amount of the adoption credit or exclusion is limited to $5,000 for each eligible child and $6,000 for each special needs child. Both the credit and the exclusion can be claimed, but cannot be claimed for the same expense. These are the maximum amount of expenses that can be claimed for all taxable years per effort to adopt a child.
Starting in 2002, certain parts of this tax benefit will phase out. The adoption credit will be available only if the eligible child is a special needs child, and the exclusion amount for assistance provided by employers will be eliminated.
When to claim the credit or exclusion
If the eligible child is a U.S. citizen or resident, the adoption credit or exclusion should be claimed in the later of 1) The year the adoption is finalized, 2) The year the adoption effort ceases, or 3) The year the expenses are paid. If the eligible child is not a U.S. resident or citizen, the adoption credit or exclusion is available only if the adoption becomes final. Then, the benefit can be claimed in the later of either 1) the year the adoption is finalized or 2) the year the expenses are paid.
Claiming the credit or exclusion
To claim the credit or exclusion, Form 8839, Qualified Adoption Expenses, must be filed with the adoptive parents' individual income tax return. Married taxpayers need to file a joint return in order to claim the credit or exclusion (certain exceptions do apply). To claim the credit or exclusion, the child must have a Social Security number. If the child is not eligible for a Social Security number, the IRS will issue either an individual taxpayer identification number or an adoption taxpayer identification number for the child.
If you have any questions, please feel free to give me a call at (562) 698-9891.
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