Using adoption credit to offset IRA conversion
|  Dear
Tax Talk,
My wife and I just adopted two babies from Russia. My wife
is taking an extended leave from working, possibly up to five years. The adoption
tax credit is around $11,000 per child, which means we have a tax credit of $22,000
to use up over the next five years. We also pay interest on a mortgage, property
taxes and have many other deductions. My question is that since my wife quit working
and I feel that my income isn't high enough to take full advantage of the credits
and deductions, can we move money from our 401(k) plans to a Roth IRA and use
the adoption tax credit to pay for the taxes on the conversion?
-- Jason
Dear Jason,
A tax credit of almost $11,000 is allowed for qualifying adoption
expenses. Qualifying expenses include reasonable and necessary adoption
fees, court costs, attorney fees, traveling expenses (including
amounts spent for meals and lodging while away from home), and other
expenses directly related to and for which the principal purpose
is 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 him- 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. The credit cannot be taken for
adopting a child of either parent (i.e., stepparent).
The adoption credit is an
amount subtracted from your tax liability. Your tax liability is based on your
taxable income less other credits that take priority. If you don't use the credit
in five years, you can lose the credit. In order to increase your tax liability
you can include in income an IRA conversion to a Roth IRA. The credit can be used
against this increased tax liability. Use Form
8839 and instructions
to figure your adoption tax credit.
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