Adoption Credit: What Expenses Are Included, How Much and The New 2010 Changes

Adopting a child is a long process and can be really costly. Prospective parents would have to attend various seminars and would have to be interviewed by a social worker on a consistent basis including numerous visits to the adopting parents home. Adopting parents would have to show that they are both financially and emotionally capable of taking care of a child. The cost to adopt is at least $10,000 and it would be more if you plan on adopting abroad because of the travel involved. The good news is that IRS provides tax break in a form of a credit if you have a lot of adoption expenses. For tax credit purposes, the eligible child must be under 18 years of age or physically or mentally incapable of caring for him/herself regardless of age.

Expansion of the Adoption Credit In 2010

Before 2010, the adoption credit is a non-refundable credit, meaning that  the amount of the credit is limited to your tax liability – and if you do not owe any taxes, you cannot take the credit for the year. However, the excess or unused credit can be applied (or carry forwarded) to the lesser of 5 years or until the credit is used up entirely. In 2010, Congress has expanded the adoption credit to make it refundable (See 2010 Tax Updates You Don’t Want To Miss). Yes, you can now take 100% of the credit regardless of whether you owe any taxes or not. In addition, the maximum credit is increased to $13,170 per child, up from $12,150 in 2009. However, this credit is reduced or phased-out if your adjusted gross income (AGI) is between $182,520 and $222, 519. And if your AGI is more than $222,520, you can no longer take the credit.

(Note: if you have unused credit that you carry forward from tax years 2009 and 2010, they will be fully refundable in 2010 and the good thing about this is these unused credit is not subject to the AGI limitations phase-out!)

What Adoption Expenses Qualifies?

For adoption expenses to qualify, they must be reasonable and necessary expenses related to, and whose principal purpose is for, the legal adoption of an eligible child. The expenses that qualifies are adoption fees, attorney’s fees, court costs, travel expenses (including meals and lodging) while away from home, re-adoption expenses to adopt a foreign child.

What Adoption Expenses Do Not Qualify?

Examples are expenses that violate state or federal law, adoption of the spouse’s child, for which you received funds under any state, local or federal programs, for carrying out any surrogate parenting agreement, allowed as a credit or deduction under any other federal income tax rule, paid or reimbursed by your employer or any other organization, paid before 1997.

When To Take The Credit

  • Until adoption becomes final – you can take the credit AFTER THE YEAR your qualified expenses were paid.
  • If the adoption becomes final –  you can take the credit IN THE YEAR your qualified expenses were paid.
  • Foreign Child Rule – if the child is not a US citizen or resident at the time the adoption process started, the credit cannot be claimed unless the adoption becomes FINAL.  You treat all adoption expenses paid or incurred in years before the adoption becomes final as paid or incurred in the year it becomes final.

How To Claim The Credit

You must complete Form 8839 and attach this to your Form 1040 tax schedule. Enter the total of the credit on Form 1040, line 71 and check box “b” on that line.

Source: irs.gov, Pub 17 – Instruction for completing form 8839.