Tax Break for Adopting Parents

Good News!!

A TAX BREAK FOR ADOPTING PARENTS

There Is A Tax Credit For Qualified Adoption Expenses

We’ve Heard Something About A New Tax Law That Helps Adoptive Parents. What’s All This About?

There is a tax credit available for individuals who pay or incur qualified adoption expenses during the taxable year. The maximum credit allowed is $11,650. There is also a tax credit of $11,650 for the adoption of a special needs child, regardless of actual expenses. There are limitations based on the adjusted gross income of the taxpayer. The credit is not available in a step-parent adoption where an individual is adopting his/her spouse’s child. However, if a person is adopting the child of a domestic partner, in a second-parent adoption, the tax credit may be available.

Is The “Tax Credit” Like An Extra Deduction?

No, a tax credit is much better than a deduction. A deduction reduces the amount of money on which you are taxed. A tax credit reduces the tax itself, dollar for dollar.

Here is an example. Let’s say that a taxpayer has an adjusted gross income of $70,000 and is in the 28% tax bracket. The tax would be computed as follows:

$70,000 adjusted gross income
x 28% tax rate
$19,600 tax due

DEDUCTION

If the same taxpayer has a $4,000 deduction, the tax would be computed as follows:

$70,000 adjusted gross income
less $ 4,000 deduction
$66,000 new adjusted gross income
x 28% tax rate
$18,460 tax due

$1,140 tax saving due to the $4,000 deduction!

TAX CREDIT

If the same taxpayer has a $4,000 tax credit, the tax would be computed as follows:

$70,000 adjusted gross income
x 28% tax rate
$19,600
less $ 4,000 tax credit
$15,600 tax due

$4,000 tax saving due to the $4,000 tax credit

A tax credit beats the daylights out of a tax deduction!

What Are “Qualified Adoption Expenses” That Will Entitle A Taxpayer To The Tax Credit?

According to the legislation, the term “qualified adoption expenses” means reasonable and necessary adoption fees, court costs, attorney’s fees, and other expenses:

  • which are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer;
  • which are not incurred in violation of State or Federal law, or in carrying out any surrogate parenting arrangement;
  • which are not expenses in connection with the adoption by an individual of a child who is the child of such individual’s spouse; and
  • which are not reimbursed under an employee program or otherwise.

The definition is fairly broad. It may be that you will need a statement from your adoption attorney or adoption agency verifying the expenses and the fact that they related directly to the adoption.

This Sounds Pretty Good. Will It Apply To All Adoptions?

No. It appears that the tax credit will apply to most adoption situations, but there are several limitations which can reduce or eliminate the tax credit. Some of the limitations are set forth below:

  1. The maximum tax credit of $11,650 is available if the taxpayer’s adjusted gross income does not exceed $174,730. If the adjusted gross income exceeds $174,730, the maximum credit available declines. If your adjusted gross income is greater than $214,730, you are not eligible for the tax credit.
  2. You can’t get a double benefit. You can’t get a tax credit if you received funds for expenses from some Federal, State or local program.
  3. The tax credit is not available in a step-adoption situation where the taxpayer is adopting the child of his/her spouse.
  4. If you are adopting a child who is not a citizen or resident of the United States, the tax credit is not available unless the adoption becomes final.
  5. The tax credit is not available for expenses incurred in violation of State or Federal law, or in carrying out a surrogate parenting relationship.

There are other limitations. To find out if you qualify for the tax credit, you should discuss your particular situation in detail with your attorney, accountant, or tax advisor.

Money From Your Employer for Adoption Expenses May be Excluded from Your Gross Income

How does the exclusion benefit us?

If your employer were to give you a bonus or subsidy for some expense you incurred, ordinarily, this would be a part of your gross income and you would probably pay tax on it. However, a bonus or subsidy for a qualifying adoption related expense may be excluded from your gross income. The result is a tax free benefit from your employer.

Are there any limits on the exclusion?

Yes. There is a $11,650 limit. The employer must have a separate written plan to provide adoption assistance to its employees. There are other technical limitations you should discuss with your tax preparer.

Can we take a tax credit and use the exclusion also?

Yes, this is possible if you have enough qualifying adoption expenses. You cannot claim a credit and an exclusion for the same expense however.

How do I find out if my employer offers a bonus or subsidy for adoption expenses?

Ask your employer. Several employers offer such a benefit. However, sometimes employees are not aware of the benefit and therefore are not able to take advantage of it.

When can I take the exclusion?

If your employer pays for qualifying adoption expenses in a year before the adoption becomes final, or in the year the adoption does become final, take the exclusion in the year the adoption becomes final. If the payment from your employer is made in a year after the adoption becomes final, take the exclusion in the year of the payment.

Will the exclusion apply to all adoptions?

As with the tax credit, there are some limitations. To find out if you qualify for the exclusion, you should discuss your particular situation with your attorney, accountant or tax advisor.

How Can I get More Information On This Tax Credit?

As was suggested above, you should discuss your particular situation with your attorney, accountant, or tax advisor.

If you want a copy of the legislation providing for the tax credit, call me and I will make a copy available to you. I can also direct you to a free IRS publication on this subject: http://www.irs.gov/publications/p968/ar01.html.

I hope the information in this document will help you. These are, of course, general answers to general questions. For specific answers to a particular situation, you should contact an experienced adoption attorney or tax professional to be certain you are getting correct answers based on your particular circumstances.

Once again, if you have any questions or want additional information, feel free to call me.

GOOD LUCK!

ALBERT G. LIRHUS