For many individuals who have decided to expand their families through adoption, there are many benefits. Yet the cost of the entire adoption process can be rather burdensome on a younger family. Therefore, the government has created the Federal Adoption Tax Credit, in an effort to ease this burden on families looking to make room in their homes for these children. While aspects of the credit may be complicated, below are a few things you need to know about how it works. Of course, you should consult your tax professional or accountant, such as L. James & Associates in Denver, CO, to determine your eligibility based on your unique circumstances.
What is the Adoption Tax Credit?
This credit was originally introduced in 1997. The purpose is to make adoption a more affordable option for families looking to provide homes for children and expand their families. The credit was made permanent in 2012 during the passing of the American Taxpayer Relief Act of 2012.
There are several types of adoption that would be deemed eligible for the credit, including adoptions completed through an agency, private domestic adoption, The Adoption Lantern, foster care or even international adoption. The only exception is when a step-parent adopts the child of their marriage partner.
How Big Is the Credit?
Currently, the credit for 2015 is $13,500 per child, but this begins to phase out for families with a higher AGI. This phase out typically begins at $201,010 but is completely reduced for families with an AGI higher than $241,010.
Because the credit is on a per child basis, the taxpayer can receive $13,400 per child that was adopted. Therefore, if a family adopted two children, then the maximum potential credit would be $26,800. However, the tax credit is not currently one that qualifies as refundable. So while it can reduce your tax liability, it cannot contribute to a greater tax refund, as some other credits might.
Qualified Expenses
There are a variety of expenses that have been deemed as necessary expenses related to the adoption process by the IRS. These include adoption consultant fees, attorney fees, agency fees, court costs, re-adoption expenses related to an international adoption and travel costs associated with the adoption.
Any expenses that might be reimbursed by a program through your employer would not be eligible for the credit. Therefore, you would need to be sure to reduce the expenses you are claiming by the amount that you were reimbursed.
However, this might not apply if the child who is adopted has special needs. In this case, you may be able to claim the full credit, even if you had some reimbursements from your employer. Consult with your tax professional to determine if you are eligible for the full tax credit.
Special Needs Adoption
If you choose to adopt a child with special needs, the entire credit may be claimed regardless of the expenses typically incurred. So what type of special needs would qualify?
Children with physical or mental disabilities may be considered special needs, especially if the state/county welfare or foster care organization has deemed the child as such. International adoptions do not qualify. Generally, it is best to determine if there is an adoption assistance agreement in place for the child to be qualified as special needs. Your placing agency or organization should be able to let you know if your adopted child qualifies.
Claiming Your Tax Credit
The credit can typically be claimed during the year that the adoption was finalized. If the expenses were incurred over several years, then they could go back and amend their taxes to take a deduction for any of those expenses in the years they were incurred. However, this primarily applies to domestic adoptions that were not for a child with special needs.
An international adoption allows you to claim all the expenses incurred over several years within the year the adoption was finalized. So if you completed the adoption in 2015, but had expenses in 2014, then you could claim all those expenses in 2015.
As you can see, adding to your family can be a joyful time for your family. But it can also provide the ability to claim a tax credit that can also ease the financial burden that adoption may bring.
Click on the link below to contact a tax professional at the L. James & Associates in Denver, CO, to determine what expenses you have incurred that are deductible and eligible for the tax credit.
