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Adoption Credit

Taxpayers may claim a non-refundable credit for qualifying expenses incurred - after 1996 - in adopting an eligible child. The credit is based on 100% of up to $5,000 of such expenses ($6,000 for a child with special needs.), and applies to expenses cumulatively incurred per CHILD, not per year.

If you are married, you must file jointly to claim the credit, unless you qualify to file as Head of Household under the exception for married taxpayers living apart. For an adoption by an unmarried couple, they must allocate the credit between them, up to the total dollar limit.

The credit is phased out ratably for taxpayers who have a modified AGI (regardless of filing status) starting at $75,000, and is phased out completely when it reaches $115,000. Modified AGI, for this purpose, is your AGI plus any exclusion of income earned abroad, plus any adoption assistance payments from your employer which you are excluding from wages.

The credit is scheduled to expire after tax year 2001, except for children with special needs.

If the credit exceeds the tax liability, the excess is not refundable, but can be carried over to each succeeding year, with any remaining excess forfeited after five years.

"Qualified adoption expenses" include any reasonable and necessary expenses, such as adoption fees, court costs, legal fees, travel and lodging/meals, or any other expenses paid for the legal adoption of the child. Expenses incurred which are in violation of federal, state or local law are not allowed for the credit. Expenses in connection with a surrogate parent arrangement, or adopting the legal child of your spouse, don't qualify.

An "eligible child" is a child under 18 at the time of adoption OR one who is physically or mentally incapable of caring for him or herself. A "child with special needs" meets that same criteria, plus must be a child in the US who cannot or should not be returned to his natural parents AND it is reasonable to conclude that he would not likely be chosen by adoptive parents unless assistance is provided, as determined by the state.

The credit CANNOT be claimed for expenses that are reimbursed on a pretax basis by an employer's Adoption Assistance program. However, the credit can be claimed on any expenses not reimbursed, ignoring the employer reimbursement for purposes of the $5,000/$6,000 maximum per child. (Amounts you are reimbursed by your employer will be shown on Form W-2, Box 13, identified with a "T". You must complete Form 8839 to exclude these payments AND/OR claim the adoption credit.)

WHEN TO CLAIM: For adoption of children who are citizens or residents of the US, the credit is claimed on the return for the EARLIER of the year that the adoption is final, OR the year after the year in which the qualifying expenses are paid. (Note: If expenses are paid in the year following the year in which the adoption is final, the credit for those can be claimed in the year the expenses are incurred.) If you incur expenses to adopt a child, but the adoption does not become final, the expenses you incur will still apply for the credit, providing that you are successful with a subsequent adoption, and reduce the $5,000/$6,000 limits by the expenses incurred in the earlier attempt.

For a child who is not a citizen or resident of the US, the credit cannot be claimed until the year in which the adoption is final.

Example 1: Patti and Tom incur the following qualifying expenses in trying to adopt their baby, who is a US citizen: $1,000 in 1999, $3,000 in 2000, $3,000 in 2001, which is when the adoption is final. They file Form 8839 for 2000 to claim a credit for $1,000, and again for 2001 to claim a credit for $4,000 (the $3,000 for 2000, plus the $1,000 remaining from the $5,000 limit, paid in 2001.)

Example 2: Sue and Scott incur $3,000 of qualifying expenses in 1999 in an unsuccessful attempt to adopt a child (US citizen). They start adoption proceedings on another child, incurring $500 of expenses in 1999 and $4,000 of expenses in 2000, which is when the adoption is final. They file Form 8839 for 2000, claiming credit for the $3,500 of expenses in 1999 and the remaining $1,500 from the expenses paid in 2000.




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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017