Adoption ABC's: Government Tax Credits and Deductions

Beginning in 2007, the credit allowed for an adoption of a child with special needs is $11,390 and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390. This credit can be claimed on the federal tax return for the year in which the adoption becomes final, and is a dollar-for-dollar reduction in tax liability. The credit begins to phase out if you have modified adjusted gross income of $170,820 or more and is completely phased out if you have modified adjusted gross income of $210,820 or more. Unmarried individuals incurring adoption expenses for the same child are considered one taxpayer for the tax credit.

Expenses reimbursed by an employer cannot also be applied to the tax credit. If a family cannot use the full credit in a particular tax year because their tax liability is less than $10,000, they can carry forward unused portions for up to five additional years.

Help make the adoption tax credit permanent!
The adoption tax credit is currently scheduled to expire in 2010. To make it permanent, The Adoption Tax Relief Guarantee Act has just been introduced in the Senate and the House of Representatives. Last year a similar bill passed in the House, but stalled in the Senate. Contact your Senator and Congressional representative now, and urge them to support "The Adoption Tax Relief Guarantee Act of 2005." This will make the adoption tax credit that allows many adopting families to take a credit of up to $10,630 against their federal income taxes permanent. Click here for complete instructions on how to contact your Congressional representative.

IRS Form 8839, Qualified Adoption Expenses, should be used to claim all qualified costs. This form is available at www.irs.gov.

Adoption assistance program

Beginning in 2007, you may be able to exclude up to $11,390 from your gross income for qualified adoption expenses paid or incurred by your employer under a qualified adoption assistance program in connection with your adoption of an eligible child. This income exclusion starts to phase out if your modified adjusted gross income is $170,820 or more and is completely phased out if your modified adjusted gross income is $210,820 or more.

Individual State Deductions

Be sure to check with your tax professional for your eligibility within your own state's guidelines. For example, Massachusetts residents can claim an exemption for fees paid to an adoption agency. For more information, please contact your state's Department of Taxation or Revenue, or your tax preparer. State Adoption Specialists can be found in the Child Welfare Information Gateway, National Adoption Directory online.

Retroactive Claims

Adoptive parents should also be aware that newly discovered tax benefits might be claimed retroactively for up to three years. Form 1040X can be filed to correct an error in a prior year return, and collect a refund if one is due.

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