The Expanded Adoption Tax Credit

Recent health care reform legislation has both extended and revised the adoption tax credit.  If you or someone you know has adopted a child this year, you may want to take note of these recent changes.  To begin, the maximum adoption credit was increased from $12,150 to $13,170 for the 2011 tax year.  In addition, the adoption credit is temporarily a refundable credit which means in may directly increase the amount of refund you receive.  In previous years, this credit was non-refundable meaning that it would only help reduce your tax liability.

The adoption tax credit was created to help offset qualified expenses associated with the adoption process.  Since this process often requires a lot of up front expense, these credits allow more families to consider adoption when it may not otherwise be possible.  These qualified expenses may be used to calculate the credit regardless of if the adoption became final or not.  According to the IRS, qualified adoption expenses must be "reasonable and necessary expenses directly related to the legal adoption of a child who is under 18 years old, or physically or mentally incapable of charing for himself or herself".  These may include adoption fees, travel expenses, attorney fees or court costs.  Before calculating the credit, be sure to subtract out any expenses reimbursed by your employer, government agency or other organization.

Determining when and how to claim the credit can be confusing.  You must consider the date of your adoption and whether the adopted child is a US citizen, resident alien or foreign national.  These variables will help you determine when your expenses might be eligible to claim toward the credit.  For detailed information, you'll want to be sure to reference the IRS instructions for form 8839.  

Once you determine your eligibility, you'll use form 8839 to claim the credit.  When you file form 8839, you must file a paper return and attach documents supporting the adoption.  These may include a final adoption decree, court documents or placement agreements.  Failure to attach these forms may cause a delay in the processing of your return.  To claim the credit, your adopted child must also have a social security number.  If you have not yet been able to obtain one, you may also request an Adoption Tax ID Number (ATIN) to be used for tax purposes only.

Lastly, it's important to note that the credit may phase out or disappear if your adjusted gross income is above certain limits.  For 2010, taxpayers with an adjusted gross income of more than $182,520 may not qualify for the full amount and the credit phases out completely at $222,520.  For 2011, it is expected that these income amounts will be adjusted slightly for inflation.  As always, for important tax matters, you should always consider discussing your situation with a tax professional.

This valuable tax credit is set to expire in 2012. The tax credit amount will revert back to $5,000 ($6,000 for a special needs child) beginning in the year 2013.

Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog.  Please use your discretion before making any decisions based on the information provided.  This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

Posted To: Tax Mommy's Blog By: Stephanie Brenneman On: Tuesday, October 11, 2011
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