The Adoption Tax Credit in 2013 and 2014

What is the Adoption Tax Credit?

According to the IRS, “The adoption tax credit offsets qualified adoption expenses, making adoption possible for some families who could not otherwise afford it. Generally, you may qualify for the adoption credit if you adopted a child and paid qualified expenses relating to the adoption. If you attempt to adopt a U.S. child, you may be able to claim the credit even if the adoption does not become final.”

Please note that even “failed” adoptions qualify for the credit. This means that if you have qualified expenses related to an un-match, they may qualify for the credit. The IRS states, “Expenses paid in an unsuccessful attempt to adopt an eligible child before finalizing the adoption of another child can qualify for the credit.”

Congress and the Obama Administration made the Adoption Tax Credit a permanent part of the tax code when they passed the American Taxpayer Relief Act of 2012.

How much is the Adoption Tax Credit in 2013 and 2014?

The maximum Adoption Tax Credit allowable in 2013 is $12,970. The maximum Adoption Tax Credit allowable in 2014 is $13,190. The Adoption Tax Credit is inflation-index. This means that the IRS will increase or decrease the amount of the Adoption Tax Credit according to the inflation rate. Practically, this usually means that the Adoption Tax Credit increases slightly each year.

Please note, if you adopt twins or triplets, you are eligible to claim the tax credit for each child.

Are There Income Restrictions on Who Can Claim the Credit?

In 2014, the Adoption Tax Credit decreases for taxpayers with a modified adjusted gross income (MAGI) over $197,880 and taxpayers with a MAGI of more than $237,880 may not claim the credit.

In 2013, the Adoption Tax Credit decreases for taxpayers with a modified adjusted gross income (MAGI) over $194,580 and taxpayers with a MAGI of more than $234,580 may not claim the credit.

What is a Qualified Expense for the Tax Credit?

Qualified expenses include attorney or agency fees, court costs, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to the legal adoption.

Please note that even “failed” adoptions qualify for the credit. This means that if you have qualified expenses related to an un-match, they may qualify for the credit. The IRS states, “Expenses paid in an unsuccessful attempt to adopt an eligible child before finalizing the adoption of another child can qualify for the credit.”

When Can I Claim the Tax Credit?

According to the IRS, “For a domestic adoption, if qualifying adoption expenses are paid any year before the adoption becomes final, the proper year for claiming the credit is the year following the year of payment. If the qualifying adoption expenses are paid during or after the year the adoption becomes final, the credit is claimed for the year of payment.”

For most families, this means you will be claiming part of the credit the year after they join the agency (and have a home study—this is the usual documentation that the IRS will ask to see), the year after a match, and the year of finalization. In addition, they may also have expenses to claim the year after finalization.

What if I Did Not Pay Enough Tax to Claim the Entire Credit?

If you did not have enough qualifying expenses to qualify for the entire Adoption Tax Credit in one year, you may carry any unused credit forward up to five tax years.

What is the Income Exclusion for Employer Provided Adoption Benefits?

According to the IRS, “You may be able to exclude from your income amounts paid to you or for you by your employer under a qualified adoption assistance program. You may qualify for the income exclusion if you adopted or attempted to adopt a child and the program paid or reimbursed you for qualified expenses relating to the adoption.”

What Forms Do I need to Fill Out to Claim the Credit?

You will need a Tax Pay Identification for your newborn. This information is in the client binder.

To file for the Adoption Tax Credit you will need IRS Form 8839. You can find the form on: http://www.irs.gov/Individuals/Adoption-Benefits-FAQs

What Records Should You Keep to Claim the Credit or Income Exclusion?

You need to keep records documenting any qualified adoption expenses.

Where Can I Find More Information?

The IRS posts information on the Adoption Tax Credit at: http://www.irs.gov/Individuals/Adoption-Benefits-FAQs

PLEASE CONSULT A TAX ADVISOR
Rubian Moss is a California CPA who can answer questions about the federal adoption tax credit (even if you do not live in California). You can reach him at: http://mosscpa.com or (925) 482-2626.