Adoption Credit
Posted on September 1, 2008
Filed Under Credits, Federal Income Tax
In 2008, a taxpayer may claim a maximum adoption credit of $11,650 ($11,390 in 2007) for each adoption effort. The limit is cumulative and traces the costs of each adoption effort; it does not necessarily refer to the costs associated with a particular individual but rather the total costs of an adoption effort that ultimately proves successful. Put differently, the credit is for a successful adoption; there is no requirement the individual eventually adopted be the same as the one originally sought. In short, it adds the costs of prior unsuccessful efforts to a successful, finalized adoption.
If by chance the sum of regular and alternative tax liability doesn’t exhaust the credit, then it can be carried forward for five years. For the 2008 tax year, the adoption credit will be phased out ratably for taxpayers with modified adjusted gross income (AGI) between $174,730 and $214,730 (the 2007 phase out range is $170,820 to $210,820 AGI). (Note: Modified AGI is AGI plus tax-free foreign income.) The adoption credit limit and the range of AGI subject to phase out are adjusted annually for inflation.
Single, head of household, and qualifying widow(er) filers can claim the credit. Married couples must file a joint return in order to claim the adoption credit. However, if a married person has custody of a qualifying individual for more than one-half of the year, lives apart from his or her spouse for the last six months of the year, and pays more than 50% of the cost of keeping up a home, then he or she can claim the credit by filing as head of household.
For purposes of the adoption credit, a qualifying individual is (1) a child under 18 years of age, (2) a person not physically or mentally capable of self-care, or (3) a special needs child.
A special needs child has the following attributes:
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The child is a citizen or resident of the U.S. or one of its possessions;
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Special adoption problems are present because of the child’s age, ethnic background, medical condition, or physical, mental, or emotional handicap; and
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The state or possession determines (1) the child cannot or should not be returned to his or her parents and (2) the child will be adopted only if the adopting taxpayer receives assistance.
Qualified adoption expenses include the following items:
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Adoption fees;
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Construction, home renovations and alterations, purchases required by the state to meet the needs of the child, and other costs directly related to the adoption;
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Court costs;
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Legal fees;
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Re-adoption expenses for the adoption of a foreign child; and
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Travel expenses necessary for the adoption, including meals and lodging.
Surrogate parenting costs, expenses in violation of state or federal law, and the costs of adopting a spouse’s child are not eligible for the credit. Click on adoption credit 2007 (pdf file) for a copy of IRS Form 8839 (Qualified Adoption Expenses) and adoption tax credit 2008 (pdf file) for help on filling out the form. In addition, the adoptive parents or individual must obtain a taxpayer identification number for the adoptee; click on adoption tax to access useful information on this topic.
A taxpayer can claim the credit at various times depending on the adoptee’s status as citizen or resident of the United States:
- Domestic adoption. If the adoptee is a U.S. citizen or resident and the taxpayer pays for qualified expenses before the adoption is final, a credit is allowed but only in the year after payment. But if payments are made during or after the year of finalization, then a credit is allowed in the year of payment.
- Foreign adoption. If the adoptee is not a U.S. citizen or resident and the taxpayer pays for qualified expenses before or during the year of finalization, then a credit is allowed in the year the adoption becomes final. But if payments are made after the year of finalization, then a credit is allowed in the year of payment.
- Foreign adoption with immediate relative (IR) visa. If a foreign-born child has an IR-2, IR-3, or a “simple” IR-4 visa, then the adoptive parents may treat the adoption as final in the tax year (1) a foreign court or agency enters the adoption decree, (2) a domestic court with jurisdiction enters a re-adoption decree, or (3) a domestic court with jurisdiction recognizes the foreign adoption decree, provided items (2) and (3) take place within two years after a foreign court or agency issues an adoption decree. If an IR-4 visa is complicated by guardianship or legal custody issues, then the adoption is final only in the tax year a domestic court with jurisdiction enters a decree of adoption.
An exclusion from gross income is available for qualified adoption expenses paid by taxpayer’s employer under a written, nondiscriminatory adoption assistance plan. In the case of a special needs child, the entire credit or exclusion applies even if the taxpayer has zero qualifying adoption expenses. However, the sum of the credit and exclusion cannot exceed $11,650 for each qualifying individual in 2008 ($11,390 in 2007). In other words, the Internal Revenue Code frowns upon double benefits: a credit and exclusion cannot be claimed for the same expense.
Additional relevant articles on the adoption credit are listed below:
Many happy returns, Roger
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