Federal Adoption Tax Credit

IRS Tax Tip 2012-42, March 2, 2012

If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.

Here are six things the IRS wants you to know about the expanded adoption credit.

  1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.

  2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.

  3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or 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 $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.

For more information see the Adoption Credit FAQ page available at www.irs.gov or the instructions to IRS Form 8839, which can be downloaded from the website or ordered by calling 800-TAX-FORM (800-829-3676).

There are two tax benefits to offset the expenses of adopting a child: the adoption tax credit and an exclusion from income of benefits under an employer's adoption assistance program. According to the IRS,the maximum adoption credit for 2011 is increased to $13,360 per child, up from $13,170 in 2010. The credit is refundable, meaning that eligible taxpayers can get the credit even if they owe no tax. In general, the credit is based on the qualified adoption expenses, which include adoption fees, court costs, attorney’s fees and travel expenses. Income limits and other special rules apply.

In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their return an adoption order or decree or certain other documents.

Because of these documentation requirements, taxpayers claiming the adoption credit will have to file paper tax returns. Normally, it takes six to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. 2010 Changes Offer Expanded Tax Benefits

In addition, many states provide reimbursement of a certain amount of non-recurring adoption expenses. Be sure to check with your state tax office to learn more about it.

The adoption tax credit
at work

For example: John and Jane Doe adopt a child in 2011. The family spent a total of $25,000 in adoption-related expenses. John and Jane Doe qualified for the maximum federal adoption tax credit for 2011 of $13,360. After utilizing the credit, John and Jane Doe's total adoption expenses were reduced to $11,640.
Doe family adoption expense: $25,000
Federal adoption tax credit: $13,360

Final total minus available tax credits: $11,640

For more information on the adoption tax credit and exclusion, visit www.irs.gov or contact a local accountant to discuss how these options may help you offset your adoption expenses

This is not a substitute for professional financial advice and should not be relied upon without consulting your tax advisor.