2010 Adoption Credit Extended Through 2011

By Salima M. Duling, Esq.
(Published in the Bethany Christian Services Newsletter, January 2011)

The 2010 refundable adoption credit has been extended through 2011. For adoptions finalized in 2010, parents may claim a refundable credit against their federal income tax for up to $13,170 on qualified adoption expenses for each adopted child. For adoptions finalized in 2011, the credit is $13,360. Adoptive parents should know the rules and seize this tax opportunity.

Who Qualifies for the Adoption Credit? In order to qualify for the adoption credit, you must be a taxpayer (1) with adjusted gross income (AGI) less than $225,210 (2) who has adopted an eligible child that year. The credit is phased out for taxpayers with adjusted gross income over $185,210 and becomes completely unavailable to taxpayers with AGI of $225,210 or more. An “eligible child” is defined to mean any child under the age of 18 at the time that the qualified adoption expense is paid OR a person of any age who is physically or mentally incapable of caring for himself.

Special Needs Child. The IRS also makes allowances for what it calls a special needs child. For purposes of the adoption credit, a “special needs child” is a citizen or resident of the U.S. whom the state has determined cannot or should not be returned to his parents and yet cannot reasonably be placed with adoptive parents without special assistance because of specific factors or conditions, such as the child’s ethnic background, age, medical condition or handicap. Parents who have adopted such a child will automatically be eligible to claim the full $13,360 adoption credit no matter how much they actually spent on qualified expenses.

What Expenses Qualify for the Adoption Credit? Expenses qualifying for the adoption credit are those expenses directly relating to the legal adoption of an eligible child. This includes the reasonable and necessary adoption fees, court costs, attorney fees, and traveling expenses. This does not include any expenses that are reimbursed by your employer under an adoption assistance program. These may, however, qualify for tax exclusion. Expenses relating to the adoption of a spouse’s child are not eligible for this credit.

How Do You Claim the Adoption Credit? IRS Form 8839 guides you in computing your adoption credit (or exclusion for expenses reimbursed by your employer). You must also include one or more adoption-related documents with your return. This means that you will have to file a paper return instead of just filing online. You also need a valid taxpayer identification number for your child to include on the return. You will need to obtain a temporary identification number, called an adoption taxpayer identification number or ATIN, for any child you are in the process of adopting by filing IRS Form W-7A. Once the adoption is final, you need to apply for a Social Security number for your child, which can then be used to identify your child on your tax return.

Conclusion. The refundable adoption credit will be a huge blessing for many parents working to make ends meet and to provide for their new son or daughter. A refundable credit is the best tax break available; it is applied to reduce your tax liability, whereas a deduction simply reduces the amount of income subject to tax. For example, a credit of $13,360 is equal to a deduction of over $35,000. A refundable credit, unlike a non-refundable credit, is not limited by your tax liability. If you owe $12,000 in taxes and have a refundable credit of $13,000, you will receive a $1,000 tax refund. Under the same facts, a non-refundable credit would reduce your tax to $0, but not result in a refund. Once your child is your dependent, you will qualify for the dependency deduction and other tax benefits. To ensure you receive the full deductions and exclusions available to you, you should consult a CPA or attorney who practices tax law.