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Raising kids is expensive. If you're trying
to adopt, it can cost you even more.
But there is tax help available. Parents
can claim a tax credit that covers some adoption expenses.
For 2006 returns, the credit could be as much as $10,960.
The exact year you can claim your expenses
depends on several factors, including when the expenses
were paid, when the adoption was finalized, and even
whether your new son or daughter is a U.S. citizen or
resident.
Domestic
vs. foreign adoptions
If the child you adopt is U.S.-born, or a resident,
here are the Internal Revenue Service guidelines on
when you can take the credit:
 |
When to claim the adoption
tax credit |
|
| Any
year before the year the adoption becomes final |
The
year after the year of the payment |
| The
year the adoption becomes final |
The
year the adoption becomes final |
| Any
year after the year the adoption becomes final |
The
year of the payment |
Court costs, adoption charges, attorney fees and travel
expenses are some of the items covered by the credit.
The rules for a foreign adoption are slightly
different. In these cases, any costs you incur cannot
be taken until the year the adoption is final. Once
your adoption of a foreign-born child is completed,
any expenses you pay after that can be claimed the year
they are paid. With domestic adoptions, you can claim
your expenses even if the adoption never is completed.
The final adoption date -- and availability
of the tax credit -- in cases involving non-U.S.-born
children depends on when the foreign-born child receives
an "immediate relative," or IR, visa from the Department
of State. Since there are various types of IR visas,
check out Internal
Revenue Announcement 2005-45 for details that could
affect your particular circumstances.
Special
rule for special needs cases
An adoption is considered a special needs case when
the child is a U.S. citizen or resident when the process
begins and the state or District of Columbia has determined
that the youngster should or cannot be returned to his
or her family.
The governing jurisdiction also must rule
that because of special factors, assistance is required
to place the child with adoptive parents.
In these cases, the new parents are allowed
to claim the maximum credit amount even if their actual
expenses did not reach that amount. For example, your
special needs adoption process was finalized in 2006.
It took two years, over which time you spent $9,000.
On your 2006 return, you can claim an
adoption credit of $10,630 even though your actual expenses
fell $1,960 short.
Accounting
for employer assistance
In addition to the tax credit, adoptive parents who
get financial help from their companies may be able
to avoid paying tax on up to $10,960 of that employee
benefit.
You may claim this income exclusion along
with the tax credit for the same adoption, basically
doubling your adoption tax break.
The only proviso: You cannot use both
the exclusion amount and credit to write off the same
expense. For example, if your company reimburses your
adoption travel costs of $10,960, you cannot use these
expenses as part of your credit filing. But all other
eligible costs up to that amount may be counted toward
the credit.
Other
credit considerations
While you can adopt a U.S.- or foreign-born child, in
most cases the youngster must be younger than 18. The
age limit is waived if the child is physically or mentally
challenged.
You cannot count expenses related to surrogate
parents or the adoption of your spouse's child in figuring
your allowable credit.
Married couples generally must file a
joint return to take the adoption credit or exclusion.
If you file as married filing separately, the credit
is available only if you meet special requirements.
The credit amount is per child, not per
year. So if the adoption of your son takes four years
and costs $17,000, you will be able claim only $10,960
of your expenses during that whole time. You can carry
forward any unused credit amounts for the adoption for
up to five years.
If the adoption is not completed, you
still can claim the credit for your expenses in the
unsuccessful adoption attempt.
The credit begins phasing out if your
modified adjusted gross income exceeds $164,410. You
can't claim the credit at all if you make more than
$204,410. The same limits apply to either single adoptive
parents or the total income of married couples filing
jointly.
Claim your adoption expenses, as well
as any adoption-related benefits you received fromyour
employer and can exclude from your income (also up to
the $10,960 limit), on Form
8839, Qualified Adoption Expenses. New in 2006,
the credit can no longer be claimed on the slightly
shorter Form 1040Z. You now must attach Form 8839 to
the long Form 1040.
Freelance writer Kay
Bell writes Bankrate's tax stories from her home in
Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
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