Adoption Credit for Qualified Adoption Expenses

To help taxpayers adopt children, United States tax law provides an adoption credit, up to a maximum of $13,360 for 2011, to adopt a child under the age of 18 or a person of any age who is physically or mentally incapacitated. The credit is claimed on Form 8839, Qualified Adoption Expenses, which must be filed by the end of the tax year.

Married couples must file a joint return to claim the adoption credit, unless the couple is legally separated under a decree of divorce or separate maintenance, or if the spouses lived apart during last 6 months of the tax year and the adopting spouse provided the home for the adopted child for more than half of the tax year and paid more than half the cost for the child's maintenance.

The 2010 Healthcare Reform law made the adoption credit refundable, meaning that the credit will also offset payroll tax liability and if the adoption credit is greater than the taxpayer's total tax liability, then the difference will be refunded.

The adoption credit is adjusted for inflation annually. The $13,360 credit limit applies to each child, not to each taxpayer, so a taxpayer adopting 2 children can claim up to $26,720. The taxpayer can claim the maximum credit for a child with special needs when the adoption is finalized, even if the credit exceeds qualified adoption expenses.

Qualified adoption expenses include:

• reasonable and necessary adoption fees,
• court costs,
• attorney fees,
• social service review costs,
• transportation costs,
• travel expenses away from home, and
• other related expenses whose purpose is to effect the legal adoption of the child.

However, adoption expenses that were reimbursed by an employer or other organization are subtracted from the qualifying expenses. No credit can be claimed for adopting your spouse's child or for the cost of a surrogate parenting arrangement. For expenses paid in previous years before the final adoption, the credit can be claimed in the following year. For a child who was a United States citizen or resident. The credit can be claimed for expenses incurred after the adoption becomes final in the year that the payment is made.

Any unused adoption expenses credit can be carried forward for up to 5 years, on a first-in, first-out basis.

Example: You pay $5,000 for adoption expenses in 2010, but the adoption was not finalized until 2011. You can claim the credit for the expenses incurred in 2010 and your expenses incurred in 2011 on your 2011 tax return.

However, the credit starts phasing out when modified adjusted gross income (MAGI) is greater than the phaseout amount of $185,210 and is phased out completely at the phaseout limit of $225,210.

MAGI = Adjusted Gross Income + Any Foreign or American Possession Earned Income Exclusions + Any Foreign Housing Deductions or Exclusions

For most people, MAGI equals adjusted gross income.

The phaseout is calculated thus:

The tax credit cannot be claimed for a foreign child until the adoption becomes final. The IRS has published certain safe harbor rules for determining when the adoption of a foreign-born child becomes final. The safe harbors apply to children who receive an immediate relative (IR) visa from the State Department.

The adoption credit requires the social security number of the child. If the child does not have a social security number, or if there is not enough time to obtain one, then the adopting parent can apply for an adoption taxpayer identification number (ATIN) on IRS Form W-7A. If the child is not otherwise eligible for a social security number, then an individual identification number (ITIN) should be obtained by submitting Form W-7.