[ShandyNBeau]

Can anyone explain the Adoption Tax Credit in plain english? I have read tons about it on websites and such but I still find it confusing....

It was explained in one place that essentially it means that we would be due a refund of everything we've paid in income tax for that year, up to 10k. Is this correct?

Thanks...

[ourdreamcametru]

I don't know a lot about it becasue my husband does our taxed but I do know we adopted in May of 2004 and were finalized in December so we got all our expenses back that same year. Our adoption was just under $6000.

[Happy123]

We paid over 12,000 in federal tax and got back $17000. We got the 12,000 plus due to having 5 children at home we got $1000 per child in tax credit.

So how it works it that it erased the fed tax we owed and made it 0. So, we got back all that we paid in.

Hope that helps,
Happy123

[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.

[ahimsa]

We finalized the adoption of our two children in December 2005. We were told that there was a 10,000 dollar tax credit for every special needs child adoption, which meant 20,000. In California, special needs is identified as any child that is over the age or 2, or non-white, or in a sibling set, or has medical/mental disabilities or needs. We also ended up owing nothing and are getting a 17,000 dollar refund. We were actually told that we didn't pay enough into taxes to get the full benefit of such a tax credit. I guess had we been in a higher income bracket we would have gotten more.

Good Luck!

[Vogi2002]

ahisma- if you qualify for the full amount, the amount that was not used this year can carry forward over to next year! So if you only used 15,000 of it this year, you can use the other 5,000 next year.

More info on special needs:

A child is a child with special needs if all three of the following apply.

The child was a citizen or resident of the United States or its possessions at the time the adoption process began.

A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents' home.

The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:

The child's ethnic background and age,

Whether the child is a member of a minority or sibling group, and

Whether the child has a medical condition or a physical, mental, or emotional handicap.

This is what i found for Texas' version of special needs so it must vary:

(a) The child must be less than 18 years old and meet one of the following criteria when the adoptive placement agreement is signed:

(1) the child is at least six years old;

(2) the child is at least two years old and a member of a minority group that traditionally creates a barrier to adoption;

(3) the child is being adopted with a sibling or to join a sibling; or

(4) the child has a verifiable physical, mental, or emotional handicapping condition, as established by an appropriately qualified professional through a diagnosis that addresses:

(A) what the condition is; and

(B) that the condition is handicapping.

(b) The state must determine that the child cannot or should not be returned to the home of his parents.

(c) A reasonable effort must be made to find an adoptive placement without providing adoption assistance, unless doing so is against the child's best interests.