Adoption and Taxes

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

In 2010 and 2011, you may be able to take a refundable tax credit for qualifying expenses paid to adopt an eligible child (including a child with special needs). This means that you could qualify for a tax refund even if you did not have federal income tax withheld. For tax years prior to 2010, the adoption credit is not refundable.

Under new Adoption Credit Rules for the 2010 tax year, you must attach one or more adoption-related documents (identified in the form instructions) with the completed Form 8839, Qualified Adoption Expenses, and attach the form to your Form 1040 or Form 1040A return, to claim the adoption credit or income exclusion. The required documents are different if the adoption is foreign, or domestic, final or not final and if the adoption is for a special-needs child.

A tax credit, including the adoption credit, reduces your tax liability. For expenses paid prior to the year the adoption becomes final, the credit generally is allowed for the year following the year of payment. For expenses paid in and after the year the adoption becomes final, the credit is allowed in the year of payment. 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.

A taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit for the expenses on the current year return, in addition to credit for expenses paid in a prior year.

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 and for which the principal purpose is the legal adoption of an eligible child. An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself. The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final. In the case of an adoption of a special-needs child, you may be eligible for a certain amount of credit or exclusion regardless of actual expenses paid or incurred. A child has special-needs if (1) the child otherwise meets the definition of eligible child, (2) the child is a United States citizen or resident, (3) a state determines that the child cannot or should not be returned to his or her parent's home, and (4) a state determines that the child 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.

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 a credit and exclusion, this dollar amount applies separately to each. For example, if we assume the dollar limit for the year is $13,170 and you paid $10,000 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 $10,000 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 (MAGI). If your MAGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. If your MAGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. If your MAGI 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.


Adoption Credit

Beginning in 2007, the credit allowed for an adoption of a child with special needs is $11,390 and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390. The credit begins to phase out if you have modified adjusted gross income of $170,820 or more and is completely phased out if you have modified adjusted gross income of $210,820 or more.

Adoption Assistance Program
Beginning in 2007, you may be able to exclude up to $11,390 from your gross income for qualified adoption expenses paid or incurred by your employer under a qualified adoption assistance program in connection with your adoption of an eligible child. This income exclusion starts to phase out if your modified adjusted gross income is $170,820 or more and is completely phased out if your modified adjusted gross income is $210,820 or more.


What is an ATIN?
An ATIN is an Adoption Taxpayer Identification Number issued by the Internal Revenue Service as a temporary taxpayer identification number for the child in a domestic adoption where the adopting taxpayers do not have and/or are unable to obtain the child's Social Security Number (SSN). The ATIN is to be used by the adopting taxpayers on their Federal Income Tax return to identify the child while final domestic adoption is pending.

Can I get an ATIN if I am adopting a child from another country?
No, you should apply through the Social Security Administration (SSA) for a valid SSN. When you are adopting a foreign child, upon the child's entry into the United States you should receive enough documentation from the Immigration and Naturalization Service (INS) to satisfy the Social Security Administration's requirements for a SSN.

Update 02-17-2011

You may be able to take a tax credit of up to $13,170 for qualified expenses paid to adopt an eligible child. The Affordable Care Act increased the amount of the credit and made it refundable, which means it can increase the amount of your refund.

Here are six things Cook and Company wants you to know about the expanded adoption credit.

1. Beginning in tax year 2010 the credit is refundable, meaning that you can get it even if you owe no tax.

2. For tax year 2010 you must file a paper tax return and Form 8839, Qualified Adoption Expenses, to get the credit and you must attach documents supporting the adoption.

3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $182,520, your credit is reduced. If your modified AGI is $222,520 or more, you cannot take the credit.