Adoptive parents may be able to claim a dollar-for-dollar tax credit for the “qualified” expenses of adopting a child up to $13,360 for 2011 (up from $13,170 in 2010) for each adopted child. That is equivalent to a deduction of over $53,400 for a taxpayer in the 25% tax bracket. For 2010 and 2011, the credit is refundable and any excess credit not used to reduce the tax is refundable. Prior to 2010, the credit was nonrefundable and could not exceed the sum of a taxpayer’s regular and alternative minimum taxes. However, any unused credit can be carried forward up to 5 years. Any carryover remaining from prior years will be fully refundable in 2010.
In addition, if the taxpayer’s employer has an adoption assistance program, he or she may be able to exclude from his or her adjusted gross income up to $13,360 for 2011 (up from $13,170 in 2010) of qualified adoption expenses paid by an employer. Both the credit and the exclusion can be claimed but not for the same expenses.
The credit is phased out if the taxpayer's income (modified AGI) exceeds the inflation adjusted threshold amount and is fully eliminated when the AGI reaches the threshold cap. These values are annually adjusted for inflation. For 2011, the threshold income is $185,210 (up from $182,520 in 2010) and the threshold cap is $225,210 (up from $222,250 in 2010). Prior to 2010 credit was subject to a limit based on tax, but an unused credit was carried over for up to 5 years. Because the credit is refundable for 2010 and 2011, there won’t be carryovers from these years.
Married taxpayers can claim the credit only on a joint return, unless the taxpayers are legally separated or have lived apart for the last six months of the tax year.
Qualified adoption 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 the legal adoption of an “eligible child.” However, the expenses do not include those to adopt a spouse’s child, surrogate mother expenses, or adoption arrangements that are in violation of state or federal laws. 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 can only qualify if the child is actually adopted.
An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. If the child turned 18 during the year, the child is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him or herself is also eligible, regardless of age.
There are additional rules related to adopting “special needs” children, and new requirements for documentation that must be filed with the tax return when claiming the credit. Please call this office if you have questions regarding “special needs” adoptions or additional questions of how the adoption credit will affect your unique circumstances.