The federal adoption tax credit. Are you eligible?

To help ease the cost of adoption, the federal adoption tax credit was increased to $10,000 in 2001, today worth $13,170 for each adoption attempt.  This credit does not eliminate the initial need for financing but eventually helps with the overall financial burden of adopting.  However, adoptive parents are often confused whether or not they are eligible for this credit.  Adoptive parents can usually claim the credit for the year of the adoption finalization, even if some expenses were incurred the year before.

Here are some specifics that describe the eligibility of the tax credit:

• For families with special needs adoptions, this bill provides “flat credit”, meaning the parents are eligible for full credit regardless of their expenses. 
• For parents taking advantage of their employer’s adoption assistance benefits, the bill has an income exclusion which allows parents to exclude these benefits from their net income.
• For lower income families, the tax credit is now completely refundable.  This means if the family’s “qualified expenses” exceed their tax liability, they receive the difference in their refund.
• What are qualified expenses? These are directly related to the adoption and are reasonable as well as necessary.  Such expenses include agency and attorney fees, court costs, travel, and costs associated with a failed domestic adoption.  These expenses do not include those reimbursed by an employer or funded by a government program.
• For families with a combined income of about $180,000 or more, the maximum available credit is greatly reduced.

Here is an example:  Adoptive parents spend $15,000 on qualified expenses, so they are eligible to claim the full credit of $13,170.  The remaining $1,830 can then be excluded from the family’s taxable income if one of their employers provided adoption benefits.

All good things can come to an end.  As the bill is set to expire in December 2011, make sure to find out if your Congressperson supports the bill at Thomas.loc.gov and search “Adoption tax”.  If not, write to them with your personal story including costs, hardships, and a picture of your new family.

Annest, Janna J. “How does the tax credit work? Am I eligible?” Adoptive Families. Dec. 2010, Page 11.