Tax releif


Hope for Children Act Tax Credit

 

The single biggest source of funds towards an adoption is the Federal Hope for Children Act which provides a substantial adoption tax credit. A single adoptive parent can take the credit, but if married, the parents must file jointly in order to take it.  The current tax credit provides up to $10,630 for qualifying expenses paid to adopt an eligible child (including a child with special needs). The adoption credit is an amount subtracted from your tax liability. Although the credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in 2005 for an adoption which became final in 2005, may be eligible to claim the credit on the 2005 return. The adoption credit is not available for any reimbursed expense. In addition to the credit, up to $10,390 paid or reimbursed through the year 2005 by your employer for qualifying adoption expenses may be excludable from your gross income.

 

Qualifying expenses include reasnable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent foe meals and lodging while away from home), and other expenses directly related to and for which the principal purpose os the legal adoption of an eligible child. An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself. The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final. An eligible child is a child with special needs if he or she is a United States citizen or resident and a state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided. The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit.

 

Under the dollar limit the amount of your adoption credit or exclusion is limited to $10,630 for each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar amount applies separately to each. For example, if you paid $9,000 in qualifying adoption expenses for a final adoption, and your employer paid $4,000 of additional qualifying adoption expenses, you may be able to claim a credit of up to $9,000 and also exclude up to $4,000. The $10,630 amount is the maximum amount of qualifying expenses taken into account over all taxable years. Therefore, it must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort, including an unsuccessful effort to adopt a different child.

 

The credit begins to phase out with an adjusted gross income (AGI) of $159,450, which means that at that income level, you will get some credit, but not the full $10,390. With an AGI of $199,450, the credit is no longer available. However, as the vast majority of Americans have an AGI of less than $159,450, the vast majority of Americans will be able to take full advantage of this credit. On the other hand, if the adoptive parents pay less than $10,390 in taxes during the tax year that they are eligible to take the credit, the credit can be applied against their tax liability for a period of up to six years, or until the full $10,390 cap is reached (whichever occurs first).

 

The biggest disadvantage is that the credit cannot be taken until after the adoption is final. For example, if the adoption is finalized on August 20, 2006, the adoptive parents could take the credit when they file their 2006 taxes in 2007, and all adoption related expenses can be applied at that time, even if they were paid in prior tax years. The practical effect of this is that adoptive parents must have the available funds for the adoption in the first place, as the credit acts as a sort of reimbursement after the expenses are initially paid. Also, note that finality for the purposes of the tax credit does not simply mean taking custody of the child. Particularly for international adoptions, if both parents travel (or if an unmarried person is adopting), in most cases the adoption becomes final for the purposes of the tax credit in the international country. However, in some cases, such as when only one parent of a married couple travels or when the international country grants guardianship to finalize the adoption in the U. S., the adoption does not become final until a decree is issued by a U.S. Court.

 

To take the credit or exclusion, complete Form 8839, Qualified Adoption Expenses. You will attach Form 8839 to Form 1040 or Form 1040A and report the credit on line 53 of Form 1040 or line 34 of Form 1040A.


More information on the federal adoption tax credit and exemption can be found online at:

http://www.irs.gov/taxtopics/tc607.html

 


Child Tax Credit

 

In addition to the Hope for Children Act tax credit which is specifically related to adoption expenses, you may also be able to take the federal child tax credit. This is a $1,000 credit for each qualifying child under the age of 17 (it is not limited to adopted children), and is available each and every year while the child qualifies (not just the year the adoption is finalized). In order to take the credit, the child must be claimed as your dependent, must be under the age of 17 by the end of the tax year, must be your son, daughter (adopted or biological) or other qualifying dependent, and must be a U.S. citizen or resident alien.

 

Like the Hope for Children Act adoption tax credit, the child tax credit phases out with increased income. If both parents file jointly, the credit begins to phase out with an AGI of $110,000. If parents are married but file separately, the credit begins to phase out with an AGI of $55,000. For all others (i.e., single parents), the credit begins to phase out with an AGI of $75,000.

 

More information on the federal child tax credit can be found online at:

http://www.irs.gov/newsroom/article/0,,id=106182,00.html or in IRS Publication 972.



State tax relief

 

Virtually all states offer some type of tax relief including tax credits, exemptions or deductions. Some states offer a tax credit (such as California) while some states offer only an exemption or deduction (such as Massachusetts) for both domestic or international adoption expenses. Unlike the federal tax credit, most states allow adoptive parents to take the applicable credit or exemption for the tax year that the expense is paid, rather than the tax year that the adoption is finalized. For specific information on individual state rules and requirements, see http://www.taxsites.com/state.html or contact your state’s tax agency or your tax professional.