[ZanesDad]

Originally Posted by NYCgaycouple

this is the major sticky point as the IRS instructions for the tax credit form are somewhat confusing.

My interpretation is the following. You can only claim one credit per "attempt". So the point is: if you have a failure and then a successful one, is that one attempt or two. In any case, you can still get the credit for the failed one, though it may compromise getting it later when you have a successful one. Even if that's the case, I would still get my money as soon as possible.

But many people in this board have claimed the credit for a failed placement, and then received it also for the successful one.

Yep, this issue hasn't been easy to understand at all (and I'm a CPA who studied tax law!)

The actual law enacted by Congress (Section 23 of the Internal Revenue Code) says there's a credit available per child adopted. It doesn't define what it means for an adoption to be final and it doesn't mention anything about the limitation of the credit when there are previous unsuccessful attempts to adopt a child.

The IRS is charged with writing regulations to interpret the law but it hasn't done so yet. They used to have Publication 968 but it was withdrawn in 2005 and hasn't been re-released. I know of one adoption attorney (AAAA) from Washington DC who says it was because the IRS no longer supported some of the positions it originally took in the publication. So currently, the only "official" guidance available from the IRS is Tax Topic 607 and the instructions to Form 8839.

Tax Topic 607 (Adoption Credit) says:

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.

OK, so what does that mean? I think you can interpret it as meaning that if you try to adopt a child, fail, then adopt a different child, you can potentially have two credits.

The instructions for Form 8839 say:

If you made more than one attempt to adopt one eligible child, combine the amounts you spent and complete only the "Child 1" line. Do not report the additional attempt(s) on the "Child 2" line. Complete the "Child 2" line only if you adopted or tried to adopt two eligible children.

Example. You planned to adopt one child. You had one
unsuccessful attempt to adopt a child and later successfully adopted a different child. Complete only the "Child 1" line because you made more than one attempt to adopt one eligible child.

This is more in line with what the IRS said in Publication 968, but both AAAA attorneys I've talked to said this logic is nonsensical, and I tend to agree. Also, according to the attorney in DC, this position doesn't have any support in the statute or the legislative history. I did find a brief mention of it one time in my own research, but that was back in 1995 (before the credit was expanded).

Now, when do you claim the expenses for a failed adoption? This is what the law says:

(2) Year credit allowed
The credit under paragraph (1) with respect to any expense shall be allowed—
(A) in the case of any expense paid or incurred before the taxable year in which such adoption becomes final, for the taxable year following the taxable year during which such expense is paid or incurred, and
(B) in the case of an expense paid or incurred during or after the taxable year in which such adoption becomes final, for the taxable year in which such expense is paid or incurred.

So, when is a failed adoption final? If the answer is "never", then you would claim the expense in the year following the year you paid it. If the answer is that the adoption is final in the year of the failure (because the process is over at that point), then you claim the expense in the year you paid it. No clear answer.

In our personal situation, we started the adoption process in 2006 with a domestic agency and paid a portion of their fee. In August 2006 we were contacted by a friend of ours in Virginia who is a midwife. She had a client who had just given birth and wanted to put the baby up for adoption. We spoke with the birthmom, traveled to Virginia, hired an attorney, and took the baby home from the hospital to our friend's house to wait on the ICPC issues to be ironed out. Then two days later the birthmom decided to place the baby with a different family, so we went back home empty handed.

Later in 2006 we were matched through our agency with a pregnant woman whom we worked with until her child was born in March of this year and he was placed with us. We will finalize his adoption next month (parental rights are already terminated).

So, for our 2007 taxes, we plan to claim two credits: one for the failed adoption in 2006 and one for the finalized adoption in 2007. For the 2006 attempt, we'll only claim the expenses related to our trip to Virginia and the attorney there (total is less than the limit). For our 2007 finalized adoption, we'll claim the limit (the agency fees alone were more than the limit).

And we'll wait and see what happens. I almost hope they challenge us - I'd love to go to court on this, maybe get a ruling named after me.

Cheers!
Frank