The taxpayer in the USA can take adoption tax credit for qualifying expenses paid to adopt an eligible child, which is adjusted by subtracting from his tax liability. In addition to the credit, certain amounts reimbursed by the employer for qualifying adoption expenses are excludable from the taxpayer’s gross income.
For both the credit or the exclusion, qualifying expenses 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 adoption.
Adoption tax credit can be availed for qualifying expenses paid to adopt an eligible child. The benefit is allowed for both domestic and international adoptions, but the credit for expenses on international adoptions can be claimed only after adoption becomes final. However, for domestic adoptions, the credit can be applied even if the adoption does not go through or is not finalized.
The credit of $10,960 is per child, not per year, so even if the taxpayer claims expenses paid out over more than one year for one adoption, the total credit amount remains the same. However, the full credit can be taken for domestic special needs adoption of retarded or challenged children even, when the qualifying expenses incurred actually fall short of the said full credit limited to $10,960.
Adoption Tax Credit Eligibility
To be eligible for the adoption credit, the taxpayer must:
- Adopt an eligible child, and
- Pay qualified adoption expenses
Eligible Children include:
- Any child age 17 or younger, or
- A child of any age who is a US citizen or resident alien and who is physically or mentally challenged and incapable of caring for himself or herself.
As indicated earlier, taxpayers who adopt a special needs child can claim the full amount of the adoption credit even when the actual expenses paid is below in the year the adoption becomes final.
Time for Claiming Adoption Tax Credit
The year of claiming the adoption credit depends on when the adoption was finalized and whether the adopted child is a US citizen, resident alien or foreign national.
If the child is a US citizen or resident alien, then the taxpayer can take the adoption credit in the following order:
- for expenses paid before the adoption is final, he can take the adoption credit in the year after expenses were paid,
- for expenses paid in the same year when the adoption became final, he can take the adoption credit in the same year, and
- for expenses paid in the year after the adoption becomes final, the taxpayer can take the adoption credit in the year of payment.
If the child is a foreign national, then the adoptive parent can take the adoption credit only in the year when the adoption becomes final. Credit for any such expenses paid in the year after the adoption is finalized, can be taken in the year of payment.
If the adopted child does not yet have a Social Security Number, the concerned taxpayer must apply for an Adoption Tax ID Number (ATIN) in order claim adopted child as a dependent. The IRS provides comprehensive guidelines in this regard.
Dollar Limitations for Adoption Tax Credit
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 adoption credit or exclusion is limited to the dollar limit for that year for each effort to adopt an eligible child. If the taxpayer can take a credit and exclusion, this dollar amount applies separately to each. For example, if the assumed dollar limit for the year is $10,960 and the concerned taxpayer paid $9,000 in qualifying adoption expenses for a final adoption, while the employer paid $4,000 of additional qualifying adoption expenses, the taxpayer may be able to claim a credit of up to $9,000 and also exclude up to $4,000 from his taxable income.
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 the taxpayer’s modified adjusted gross income (modified AGI). If the modified AGI is below the beginning phase out amount for the year, the income limit will not affect concerned taxpayer’s credit or exclusion. If the modified AGI is more than the beginning phase out amount for the year, the taxpayer’s credit or exclusion will be reduced. If the modified AGI is above the maximum phase out amount for the year, credit or exclusion enjoyed by the taxpayer will be eliminated.
Carry Forward of Adoption Tax Credit
Any unabsorbed adoption credit in excess of the tax liability can be carried forward up to five years until set off.
(More:http://www.irs.gov/taxtopics/tc607.html)
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