[Vogi2002]

Okay so here it goes, this is all I know, for domestic adoptions and claiming the tax credit. For domestic adoption it is:

Basic Breakdown:
You can take up to 10,000 qualified expenses PER ADOPTION. This is a credit. It is credited toward the taxes you owe in (you can't take out more than you owe basically). You can claim it the year that it is finalized and/or the year after expenses were paid (more info below). It is able to be carried over for up to five years. Special needs adoptions can take the full amount regardless of amount they paid in expenses.

What are qualified adoption expenses?

Qualified adoption expenses include:
Adoption fees.
Attorney fees.
Court costs.
Travel expenses (including meals and lodging) while away from home.
Re-adoption expenses relating to the adoption of a foreign child.

Qualified adoption expenses do not include expenses:
For which you received funds under any state, local, or federal program.
That violate state or federal law.
For carrying out a surrogate parenting arrangement.
For the adoption of your spouse's child.
Paid or reimbursed by your employer or any other person or organization.
Paid before 1997.
Allowed as a credit or deduction under any other provision of federal income tax law.

Who can claim this?

You may be able to take the credit or exclusion if all three of the following apply.
Your filing status is single, head of household, qualifying widow(er), or married filing jointly. If your filing status is married filing separately, see Married Persons Filing Separate Returns below.
Your modified AGI is less than $199,450 or you have a carryforward of an adoption credit from a prior year. The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. If you modified AGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. if your modified AGI is above the maximum phase out amount for the year, your credit or exclusion will be eliminated.


When can I claim this?

You can either claim it the year AFTER the money was paid OR the year that the adoption became FINALIZED.

For example:
For 2005, you can claim it on your taxes if You paid qualified adoption expenses:
in 2004 and the adoption was not final at the end of 2004, or
in 2005 and the adoption became final in or before 2005.
You adopted a child with special needs and the adoption became final in 2005.
You have a carryforward of an adoption credit from a prior year.

If the adoption did not become final by the end of 2005, you cannot take the adoption credit for that child in 2005. If the adoption becomes final in a later year, you may be able to take a credit for the expenses in that year.

What if my employer has paid expenses?

Employer-provided adoption benefits are amounts your employer paid directly to either you or a third party for qualified adoption expenses under a qualified adoption assistance program. Generally, a qualified adoption assistance program is a separate written plan set up by an employer to provide adoption assistance to its employees.

The adoption credit is not available for any reimbursed expense. In addition to the credit, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

How much can I claim?

Adoptive parents may qualify for a tax credit of up to $10,630 (for 2005) for qualifying expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses.

What if I don't need to use it all the first year?

The credit will carryforward for up to five years. So if you have 15,000 in expenses, you are able to take the full 10,000 credit. Now, if you:

Pay very little in taxes through the year through your employer, at the end of the year you owe the government 9,000 in taxes. You have paid in total throughout the year to your employer 4,000 so you now owe 5,000. You will then recieve 4,000 back and you will not have to pay the 5,000 (basically it credits you back as much as you owe up to 10,000).

My husband and I don't usually put more than 8 - 9,000 in but with all they excusions and deductions we get we actually don't need very much of the tax credit in order to get back everything we have put in (so we will get back 3,000 on our 'normal' end of the year tax check, but using 6,000 of our credit will make us get back 9,000). So next year I then have up to 4,000 to use.

The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit. Please check irs's website or talk to your tax accountant to be sure.

What if I have a FAILED adoption? Can I still claim the amount?

In short, yes. You are able to credit up to 10,630 for EACH failed adoption attempt the YEAR AFTER the expenses were paid.

I hope this makes a little sense, I tried to double check most of it with irs, but if any of it's incorrect I apologize. If you are doing an international adoption there are a few special rules, you should look into more, or tell me and I can add them.

Natalie

P.s. someone should STICKY a post that explains it very drawn out like to the top of this board and the financing adoption board.