The Expansion of the Adoption Tax Credit

Recently the IRS published their Summertime Tax Tip 2011-10, which lists out six facts about the expanded adoption tax credit.  The credit is considered “expanded” due to the changes made by the Affordable Care Act of 2010, which increased the amount of the credit, while also making the credit refundable.  Refundable credits are such that, even if your tax on your tax return is less than the credit, whatever amount of your credit surpasses the tax can be refunded to you (much like the Earned Income Tax credit).

Six Expanded Adoption Credit Facts

Here are the six facts that the IRS lists:

  1. The adoption tax credit, which is as much as $13,170, offsets qualified adoption expenses making adoption possible for some families who could not otherwise afford it.  Taxpayers who adopt a child in 2010 or 2011 may qualify if you adopted or attempted to adopt a child and paid qualified expenses relating to the adoption.
  2. Taxpayers with modified adjusted gross income of more than $182,520 in 2010 may not qualify for the full amount and it phases out completely at $222,520. The IRS may make inflation adjustments for 2011 to this phase-out amount as well as to the maximum credit amount.
  3. You may be able to claim the credit even if the adoption does not become final.  If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.
  4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself.  These expenses may include adoption fees, court costs, attorney fees and travel expenses.
  5. To claim the credit, you must file a paper tax return and Form 8839, Qualified Adoption Expenses, and you must attach documents supporting the adoption.  Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children.  You can still use IRS Free File to prepare your return, but it must be printed and mailed to the IRS, along with all required documentation.  Failure to include required documents will delay your refund.
  6. The IRS is committed to processing adoption credit claims quickly, but it also must safeguard against improper claims by ensuring the standards for this important credit are met.  If your return is selected for review, please keep in mind that it is necessary for the IRS to ensure the legal criteria are met before the credit can be paid.  If you are owed a refund beyond the adoption credit, you will still receive that part of your refund while the review is being conducted.

For more information see the Adoption Benefits FAQ page on the IRS’ website.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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