| |
ADOPTION TAX CREDIT |
| |
Is there government assistance available to help offset the financial expense of adopting a child? |
| |
What is a credit and how is it different than a deduction? |
| |
How much is the adoption credit? |
| |
Are there exceptions as to the amount of the adoption credit? |
| |
What if we cannot use the full adoption credit? |
| |
What expenses can we use in calculating the adoption credit? |
| |
When can we take the adoption credit? |
| |
My employer provides some adoption assistance. Do we have to include this as income on our income tax return? |
| |
We’re adopting a child from another country. Are there any special rules? |
| |
Do we have to complete the adoption to qualify for the adoption credit? |
| |
What if we are adopting more than one child? |
| |
Does the adoption credit apply to all adoptions? |
| |
|
| Q: |
Is there government assistance available to help offset the financial expense of adopting a child? |
| A: |
Yes. The federal government allows a credit against tax owed for qualified adoption expenses. You should consult your lawyer or your agency regarding any other types of grants or assistance. |
| |
Back to Top |
| |
|
| Q: |
What is a credit and how is it different than a deduction? |
| A: |
A deduction reduces your taxable income before calculating tax. A credit does not reduce income, but instead reduces your tax. Therefore, if you were in the 25% tax bracket, a deduction of $1,000 would produce a tax benefit of $250, but a credit of $1,000 produces a tax benefit of $1,000. |
| |
Back to Top |
| |
|
| Q: |
How much is the adoption credit? |
| A: |
The amount of the adoption credit generally depends on the amount of your adoption expenses. The maximum credit is $10,960 for the 2006 tax year and $11,390 beginning in the 2007 tax year. |
| |
Back to Top |
| |
|
| Q: |
Are there exceptions as to the amount of the adoption credit? |
| A: |
Yes. If you adopt a child with special needs you can take the maximum credit regardless of your actual adoption expenses. To qualify as a child with special needs, the child must be a citizen or resident of the United States. The state must also have determined the child cannot or should not be returned to the parents and that there is a specific factor or condition such that the child cannot be placed with adoptive parents without providing adoption assistance. |
| |
Back to Top |
| |
|
| Q: |
What if we cannot use the full adoption credit? |
| A: |
The adoption credit can be carried forward to future tax years, but limited to the five years. |
| |
Back to Top |
| |
|
| Q: |
What expenses can we use in calculating the adoption credit? |
| A: |
You can include adoption fees, court costs, attorney fees, and other expenses directly related to the legal adoption of the child. The expense cannot, however, be included if incurred in the violation of a state or federal law. Expenses relating to surrogate parenting arrangements cannot be included. |
| |
Back to Top |
| |
|
| Q: |
When can we take the adoption credit? |
| A: |
With regard to expenses incurred before the adoption becomes final, you claim the credit in the taxable year following the taxable year in which the expense was incurred, e.g. you claim expenses from 2005 on your 2006 taxes which you file in 2007. Expenses incurred during the year in which the adoption is finalized, or years after finalization, you claim the expense in the year you pay the expense. |
| |
Back to Top |
| |
|
| Q: |
My employer provides some adoption assistance. Do we have to include this as income on our income tax return? |
| A: |
The rules for employer adoption assistance programs and the adoption credit are identical. Reimbursement through an employer adoption assistance program will not be included in your income. You cannot have a double benefit by excluding reimbursements from an adoption assistance program and taking the adoption credit for the same expenses, however, you can still claim the adoption credit for other non-reimbursed adoption expenses. |
| |
Back to Top |
| |
|
| Q: |
We’re adopting a child from another country. Are there any special rules? |
| A: |
Yes. You cannot take the adoption tax credit for a foreign adoption until the adoption is final in the foreign country. When you become eligible for the credit, you can take expenses for previous years as if they were incurred in the year the adoption was finalized. |
| |
Back to Top |
| |
|
| Q: |
Do we have to complete the adoption to qualify for the adoption credit? |
| A: |
No, with one exception. You must complete a foreign adoption in the foreign country before you can claim the adoption credit. With respect to domestic adoptions, you can still claim the credit for expenses, even if the adoption is not finalized. |
| |
Back to Top |
| |
|
| Q: |
What if we are adopting more than one child? |
| A: |
The credit limit is applied on a per child basis rather than an annual basis. Therefore, you could claim up to $11,390 per child if you meet all the other requirements. |
| |
Back to Top |
| |
|
| Q: |
Does the adoption credit apply to all adoptions? |
| A: |
No. You cannot claim the adoption credit if you are adopting your spouse’s child, commonly referred to as a stepparent adoption. |
| |
Back to Top |
