The Federal Adoption Tax Credit has been increased to $13,170. This is in addition to the $1,200 State of Michigan Tax Credit. Even more importantly, the adoption tax credit is now refundable. This means that you get the tax credit as a refund all in one year.
Now, lower income people who adopt can claim this tax credit and get a large refund! This is great news for adoption!
Did you know that you might be entitled to an adoption tax credit? The tax credit was recently increased to $13,170 for certain expenses paid to adopt an eligible child. This is in addition to the $1,200 State of Michigan Tax Credit. Even more importantly, the adoption tax credit is now refundable. This means that you get the tax credit as a refund all in one year, even if your income is not high enough to have any tax liability This tax credit includes adoption of children with special needs.
IRS qualifying expenses would include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child. Expenses for a failed adoption might qualify for the credit if followed by a successful adoption, but the two adoption efforts would be considered as one adoption and subject to the dollar limit per eligible child.
An eligible child is one who is either under 18 years old, or is physically or mentally incapable of caring for him or herself and is a United States Citizen or resident alien. If you adopt a special needs child, however, you are entitled to claim the full amount of the adoption credit, even if your out-of-pocket expenses are less than the tax credit amount.
The adoption credit is an amount subtracted from your actual dollar tax liability. For expenses paid for the year prior to the finalization of the adoption, the credit is generally allowed for the following year of payment. A taxpayer who paid qualifying expenses in the same year the adoption became final became, may be eligible to claim the credit for the expenses on that year’s tax return, in addition to credit for expenses paid in a prior year. The adoption credit is not available for any reimbursed expense. In addition to the credit, certain amounts paid by your employer for qualifying adoption expenses may be excludable from your gross income.
The adoption credit is calculated on IRS Form 8839 Qualified Adoption Expenses. You may claim an adoption credit of up to $13,170 (for tax year 2010) per eligible child. The IRS provides a worksheet for figuring your modified adjusted gross income for the adoption credit in the Instructions for Form 8839. The adoption credit is scheduled to sunset after 2011. In other words, the dollar amount of the adoption credit will revert back to $5,000, or $6,000 if a special needs child is adopted, beginning in the year 2012, unless the current legislation is modified to allow for the continued adoption credit.
The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption is actually finalized. If the child is a foreign national, then you may take the adoption credit only in the year when the adoption becomes final. For any expenses paid in the year after the adoption is finalized, you may take a credit for those expenses in the year that you paid them.
If your adopted child does not yet have a Social Security Number, you must apply for an Adoption Tax ID Number (ATIN) in order for you to begin claiming your adopted child as a dependent. The IRS provides comprehensive information on the Adoption Taxpayer Identification Number.
A taxpayer also may be eligible to take an increased credit or exclusion for expenses related to the adoption of a child with special needs if the child otherwise meets the definition of qualifying child, is a United States citizen or resident and a state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided. The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit.
Under the dollar limit the amount of your adoption credit or exclusion is limited to the dollar limit for that year for each effort to adopt an eligible child. If you can take both a credit and exclusion, this dollar amount applies separately to each. For example, if we assume the dollar limit for the year is $10,000 and you paid $9,000 in qualifying adoption expenses for a final adoption, while your employer paid $4,000 of additional qualifying adoption expenses, you may be able to claim a credit of up to $9,000 and also exclude up to $4,000.
The dollar limit for a particular year must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort. The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. If your modified AGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. If your modified AGI is above the maximum phase out amount for the year, your credit or exclusion will be eliminated.
Generally, if you are married, you must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements. It is recommended that you keep careful records and receipts of all expenses paid relating to the adoption of your child. You should consult with your tax preparer to determine what expenses qualify and to determine the amount of credit you are entitled to.