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Financial impact of adoption

By Jason Alderman

It's hard to think of any act more generous than adopting a child. Many adoptive parents I know tell me it's the most personally rewarding thing they've ever done.

But adoption isn't cheap. Related expenses can quickly mount to tens of thousands of dollars. And sadly, sometimes adoptions do fall through, forcing prospective parents to endure the process – and expense – all over again.

Fortunately, the IRS provides significant tax incentives for people who adopt, including the adoption tax credit and an exclusion from taxable income for expenses paid through an employer's adoption assistance program.

Several IRS rules policies and dollar limits for adoption tax credits and exclusions have changed for 2012:

Depending on your income level, you may be able to claim a non-refundable tax credit for up to $12,650 for qualified expenses paid to adopt an eligible child. A few adoption credit rules and definitions:

  • The adoption credit is per child; thus the amount doubles if you adopt two children in the same year.
  • For your adoption expenses to be eligible, the child must be under age 18 or physically or mentally unable to care for himself or herself.
  • "Non-refundable" means you can claim a credit for only up to the tax amount you owe.
  • "Qualified adoption expenses" include adoption fees, court costs, attorney fees and travel expenses (including meals and lodging while away from home). See IRS Form 8839 at www.irs.gov for details.
  • If your modified adjusted gross income is $189,710 to $229,710, the credit amount you can claim gradually reduces; over $229,710, you cannot claim any credit.

Families who adopt special needs children are entitled to claim the full $12,650 credit, even if their out-of-pocket expenses were less than that amount. "Special needs children" are those the state determines cannot or should not be returned to their parent's home and who probably won't be adopted unless assistance is provided. This group may include older children, siblings, children with disabilities and those currently in foster care.

If the child is a U.S. citizen or resident alien, the following rules apply for both successful and failed adoptions:

  • For expenses paid before the adoption is final, take the credit on the following year's tax return.
  • For expenses paid in the year the adoption is finalized, take the credit on that year's return.
  • For expenses paid in the year after finalization, take the credit in the year paid.
  • Because it's nonrefundable, if the credit due to you exceeds a given year's tax liability, you may carry any remaining credit forward for up to five years, until you've used it up.

If the child you adopt is a foreign national, you may only claim the tax credit or exclude employer-paid benefits after the adoption has become final. In addition, if the adoption is ultimately unsuccessful, you cannot collect the credit for those expenses.

In addition to the tax credit, you also may be able to exclude from your gross income for tax purposes any employer-paid amounts under a qualified adoption assistance program, whether paid to you or a third party. See Form IRS 8839 for details.

Adoption should not be entered lightly. A good place to start your research is the government's Child Welfare Information Gateway at www.childwelfare.gov.




This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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