Wednesday, February 19, 2014

Adoption Tax Credit: An Overview

On January 2, 2013 a significant event in the benefit to the adoption process occurred when the United States Congress signed the bill which averted the “fiscal cliff”.  This bill included the American Taxpayer Relief Act, which provided for the permanent extension of the adoption tax credit, as it was issued in 2001.  The bill extends to taxable years after December 2012.  It allows taxpayers who adopt children to receive a tax credit for qualified adoption expenses, making adoption a more viable option for many individuals and couples who might not otherwise have believed adoption to be affordable.  The bill also includes provisions for exclusion from taxable income, adoption expenses paid by an employer.
The American Taxpayer Relief Act assists many adoptive parents and families to offset included expenses of adoption.  It is important to note however, that the tax credit provided in the American Taxpayer Relief Act does not apply to stepparent adoptions. And did not make the adoption credit refundable.  The adoption credit benefits adoptive parents who have federal income tax liability.  Congress however is still able to make changes to the credit in future legislation.
The maximum allowable credit and exclusion is currently set at $12,970 per child.  There is no limit to the number of children families may adopt.  The credit is adjusted and begins to phase out when individuals and couples have a gross income exceeding $194,580.00 and is eliminated for families with a gross income in the range of $234,000.
The adoption tax credit applies to expenses such as adoption fees, including court costs, attorney fees and travel expenses.  Excluded expenses include amounts reimbursed or paid by an employer, adoption assistance organization or any other person.  Also excluded are expensed which violate federal of state law or funds that are received in association with federal, state of local adoption programs.
Despite the limitations and restrictions the American Taxpayer Relief Act represents a considerable benefit to families who adopt children in the United States.  Its existence serves to incentivize the adoption of children in need of stable, loving and supportive families.  By  correctly following the provisions of the Taxpayer Relief Act, families are able to reconsider the affordability of adoption when starting or increasing the size of their family.
In order to claim the credit, taxpayers must file IRS Form 8839.  The IRS regulations state that FORM 8839 may not be filed until the end of the month of February.  Families may claim the credit before the finalization of an adoption, but must wait one year after incurring expenses.  Taxpayers have six years to utilize the tax credit.  This includes the year an expense is first incurred and the subsequent five years.
Advocates of adoption continue to work to seek and advance laws that support and encourage adoption.  The permanency to the adoption tax credit represents a huge step in the right direction.  Adoption is an admirable and fulfilling life decision.   We hope to continue to keep you informed and empowered as more progress is made in the area of creating families through adoption.
The information provided here should not be use as legal advice and does not substitute or replace the advice of legal counsel of tax professionals.  Please consult an attorney and tax advisor before taking any action to discuss your specific and individual circumstance, on how the Adoption Tax Credit may be used when filing your taxes.
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