Federal Adoption Tax Credit
Great news for adoptive parents! The federal adoption tax credit has been renewed for 2014.
- In January 2013, the Federal Adoption Tax Credit was made permanent. The adoption credit is non-refundable, which means that only those individuals with tax liability (taxes owed) will benefit.
- The 2014 federal adoption tax credit is $13,190. Adoptive parents may claim the tax credit if their modified adjusted gross income is not more than $197,880. For those with incomes in excess of this amount, the credit can still be claimed up to modified adjusted gross incomes of $237,880, but the credit proportionally decreases as the maximum income level is approached. The 2013 federal tax credit was $12,970.
- It is important to recognize this is an adoption tax credit, not a mere deduction. A tax credit is far better than a deduction. For example, a common taxpayer deduction is interest paid on a home mortgage. The deduction is subtracted from the taxpayer’s taxable income, and then the tax owed is determined. A credit, however, is a dollar for dollar elimination of tax owed.
- A critically helpful factor to be aware of, benefiting everyone, is that there is a five year carryover period. This means that if the adoptive parents are eligible for the tax credit due to having qualified adoption expenses up to the tax credit amount, but their tax liability is less than their adoption expenses, leaving "left-over" credit, the "left-over" credit carries over each year, to a maximum of five years after the year of the initial tax filing, until the credit can be used to offset tax liability.
- Qualified adoption expenses are reasonable and necessary adoption fees. These expenses may include: 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.
- In domestic adoption there is some flexibility on when you can take the credit:
- For adoption expenses paid before the adoption is final, the adoptive parents take the tax credit in the year after their adoption expenses were paid. So if the expense was paid in 2012, it would be claimed on the 2013 tax return, which would actually be filed in 2014.
- For adoption expenses paid in the same year the adoption is finalized, the adoptive parents take the tax credit in that same year. So if paid in 2013, it is taken on the 2013 tax return, filed in 2014.
- In the unlikely event there are adoption expenses in the year after the adoption is final, the adoptive parents take the tax credit in the year in which the expenses were paid.
- You may be able to exclude from your income amounts paid to you or for you by your employer under a qualified adoption assistance program. You may qualify for the income exclusion if you adopted or attempted to adopt a child and the program paid or reimbursed you for qualified expenses relating to the adoption.
- You are able to file taxes without your child’s social security number, which is received after the adoption is finalized. You or your accountant and/or tax representative can apply for a temporary tax identification number for the baby. You can file your taxes with that number. You can download Form W-7A at www.irs.gov, which can be filed to obtain a temporary tax ID number.
- To claim the Adoption Tax Credit, complete Form 8839 (Qualified Adoption Expenses). This form can be obtained from the IRS by calling them at 1-800-829-3767 or download one at http://www.irs.gov/pub/irs-pdf/f8839.pdf.
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.