Its that time of year again and if you haven’t already filed your taxes you may want to remember that the Federal government wants to encourage adoptions and established the adoption tax credit. This generous credit was due to expire in 2012 but the Adoption Tax credit was made permanent under the fiscal cliff tax deal enacted on January 1, 2013. If you adopt a child, this credit can save you as much as $13,190 in taxes in 2014.
Who Qualifies for the Credit
You qualify for the adoption tax credit if you incur out-of-pocket expenses to adopt a child under 18 years of age, or a child of any age who is physically or mentally disabled. The child can be a United States citizen or resident alien (a “U.S. child” in IRS parlance), or a nonresident alien.
How Much Is the Credit?
For 2014, the maximum credit is $13,190 per child.
The credit applies to all reasonable and necessary adoption expenses, including:
- court costs,
- attorney fees,
- traveling expenses (including meals and lodging while away from home),
- and other expenses directly related to the legal adoption of an eligible child.
- Expenses for a foreign adoption (where the child was not a U.S. citizen or resident at the time the adoption process began) qualify only if you actually adopt the child.
You cannot claim the credit for:
- expenses for adopting your spouse’s child
- payments to a surrogate parent
- payments that violate state or federal law,
- payments that are reimbursed by your employer or any other organization, or
- expenses you paid using funds you received from a federal, state, or local program.
Moreover, you may not get the full amount of the adoption credit if your modified adjusted gross income (MAGI) is more than $197,880 and the credit is completely phased out if your MAGI is more than $237,880.
Unless you adopt a child with special needs, the adoption tax credit is not refundable, meaning you only benefit from it if you owe federal income taxes. However, any unused credit amount can be carried forward to reduce your tax liability for the next five years until the credit is used up. For example, if your tax liability is $10,000 and your credit is $12,000 that tax year, the adoption credit would reduce your tax liability to zero for that tax year and you could carry carry the remaining $2,000 credit forward to deduct in any of the next five years.
Adopting Children with Special Needs
If you adopt a child with special needs, 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. For example, even if you incur no expenses to adopt a special needs child, you are still entitled to the full credit.
A child is considered special-needs if:
- the child is a United States citizen or resident
- a state determines that the child cannot or should not be returned to his or her parent’s home, and
- a state determines that the child probably will not be adopted unless assistance is provided.
The adoption credit is calculated on Form 8839 Qualified Adoption Expenses
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