Posted by James Financial Services Inc

How The Adoption of a Child Can Affect Your Tax Return

How The Adoption of a Child Can Affect Your Tax Return

For parents throughout the United States, adopting a child is something they wait years to do, and a source of great joy.  However, the adoption process is not without significant expenses.  At James Financial Services, Inc. in Virginia Beach, VA, a professional can help you to seek IRS benefits which can help counteract some of the costs associated with adopting, and having a new child to care for.

    Adoptive parents can be expected to spend significant amounts in fees and procedures.  They can report most of these expenses on Form 8839, Qualified Adoption Expenses.  Qualifying expenses include adoption fees, court costs, attorney fees, and travel expenses, including meals and lodging when away from home for reasons related to the adoption.  Many adoptive parents qualify for a credit based on these expenses known as the Adoption Credit. 

The adoption credit is typically available for domestic and foreign adoptions, but there are specific timing rules which are based on the type of adoption.  A domestic adoption is defined by the IRS as an adoption of an eligible child who is a citizen or resident of the United States before the adoption process begins.  In this case, qualified expenses paid before the year the adoption becomes final are still allowable as a credit for the tax year following the year of payment, even if the adoption does not go through.  A foreign adoption, or the adoption of an eligible child who is not a citizen or resident of the US before the adoption effort begins, allows adoption expenses paid before and during the year as a credit for the year the adoption becomes final.  Once the adoption is final, expenses paid during the final year are allowable as credit for the year of payment.

    The adoption credit is non-refundable, and is applied to your adoption expenses up to $13,400.00 per eligible child.  In order to be considered an eligible child, the adopted individual must be under eighteen years old, or physically/mentally unable to take care of him or herself. 

    There are some limitations associated with adoption credit.  Filing status, for instance, can affect the credit.  If you file as Married Filing Separately, you are ineligible to claim the adoption credit.  You can remedy this by filing an amendment with a different filing status in order to claim the adoption credit.  Make sure you consult a professional like James Financial Services, Inc. to compare your benefits pre and post amendment, as well as the proper procedure and legal implications. 

    Expenses and income limits also apply to the adoption credit.  If you make a certain amount (over $241,000.00 per year), you cannot qualify for the adoption credit at all.  You may only claim the credit up to the amount you spent, with further restrictions if you are reimbursed by an employer or state agency, you may not qualify for those expenses. 

    If you were planning to become an adoptive parent, but the process did not complete, you can claim expenses for unsuccessful adoption attempts.  

There are some exceptions to the limitations for reimbursement if the adopted person has special needs.  If you adopt a child with special needs, you may claim the maximum adoption credit regardless of how much you spent on adoption-related expenses.  Special needs individuals who qualify are children who cannot be returned to the birth parent’s home, could not have been adopted unless assistance was provided, and has been classified as special needs by the state agency or social worker. 

Just because you do not qualify for the adoption credit does not mean that you are left on your own.  If your employer did provide assistance for the adoption process, either by giving funds to you directly or by paying a third party, you can exclude the benefits from your taxable income up to $13,140.00.  So, although you may not include these expenses in the amount allowed for your credit, you do not have to pay taxes on them either.  

In order to claim the adoption credit, you need to have proof of the adoption in the form of a copy of the certificate signed by the judge and sealed by the court.  Because of this, you cannot file your income taxes electronically if you wish to claim the adoption credit.  You will need to file paper and include the proof with your return.  You should also plan on having proof of adoption expenses when you decide to claim the adoption credit.  This includes receipts, invoices, legal correspondence and, if the child is special needs, a copy of the determination from your state.  

    Once you have legally adopted a child, that child is considered a qualifying child in relation to your dependent credits and deductions.  You can claim deductions for expenses for a dependent, including medical expenses.  You can also claim the Child Tax credit, which serves to balance the expenses for caring for a child.  If you are within certain income restrictions, the Earned Income Tax Credit is sizable for those with children.  In addition, you can claim the Care Credit if you paid someone to watch your child while you were at work.  

    If you have adopted or are in the process of adopting a child, and you live in the Virginia Beach, VA area, contact a professional from James Financial Services, Inc. to help you claim the maximum benefits available to you.



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