Adoption Credit

Josh Nowack

March 5, 2015

It was indeed pretty cool that in 2005 my brother and I became parents just a few months apart.  After all, with a four year age difference, we were always one step apart in life's events.    I entered high school, he went to college.  I entered college, he graduated, etc.  For the first time, we went through life's events at the same time.

There was, of course, a slight difference.  Jen and I had a traditional parenting process.  Brian's process was through adoption.  Decisively, his process was more expensive.  Now as a tax guy, here are some tax opportunities with respect to adoption.

For 2015, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $13,400 of “qualified adoption expenses” (see below) for each adopted child. Also, adoptive parents may be able to exclude from their gross income up to $13,400 (for 2015) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are reduced (phased out) if the parents' income exceeds certain limits, as explained below.

Qualified adoption expenses. To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the 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 the legal adoption of an “eligible child” (defined below).

Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e., one in which the child isn't a U.S. citizen or resident) qualify only if the child is actually adopted.

Benefits are enhanced if the child has special needs.  This refers to a child who the state has determined cannot or should not be returned to his parents and who can't be reasonably placed with adoptive parents without assistance because of a specific factor or condition, e.g., ethnic background, age, membership in a minority group, medical condition, or handicap. Only a child who is a citizen or resident of the U.S. is included in this category.

For domestic adoptions, you take the credit in the year that follows when you spent the money up until the adoption is final.  In the case of a foreign adoption, or an adoption of a child with special needs, the credit is taken when it's final.  

Phase-out for high-income taxpayers. The credit allowable for 2015 is phased out for taxpayers with adjusted gross income (AGI) over $201,010 and is eliminated when AGI reaches $241,010. The 2015 credit is reduced by a percentage equal to the excess of AGI over $201,010 divided by $40,000.

For example, say taxpayers who could have otherwise claimed a $2,000 credit have AGI of $211,010 in 2015. Their $211,010 AGI minus $201,010 equals $10,000, and $10,000 divided by $40,000 is 25%. Accordingly, the taxpayers “lose” 25% of their credit ($2,000 times 25% is $500) and can only claim a credit of $1,500. (Special rules for determining AGI apply in some cases.) The phase-out rules for high-AGI taxpayers apply for the exclusion as well.

As always, if you have questions, make the phone ring.

   

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