November is National Adoption Awareness Month

 By Guest Blogger Don Paris, CPA, MST, CDFA.

By now you are well aware that each year, November is recognized as National Adoption Awareness Month. In celebration, I thought it important to tell you about a little known fact, i.e. there are great federal income tax credits available to adoptive parents.

What is the tax credit? Adoptive parents may be able to claim a nonrefundable credit against their federal income tax for up to $12,970 (for 2013) of “qualified adoption expenses” for each adoptive child. Also, adoptive parents may be able to exclude from their gross income up to $12,970 (for 2013) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are reduced (phased out) if the parents’ income exceeds certain limits.

So what are “Qualified Adoption Expenses”? To qualify for the credit or exclusion, the expenses must be “qualified adoption expenses”. These are the reasonable and necessary adoption costs which include court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an eligible child. These qualified adoption expenses do not include expenses connected with the adoption of a child of a taxpayer’s spouse, expenses of carrying out a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a federal, state or local program. Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e. one where the child isn’t a US citizen or resident) qualify only if the child is actually adopted.

What about a Special Needs Child? Taxpayers who adopt a child with special needs will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total expenses for the adoption up to $12,970 for 2013. They can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $12,970 in actual expenses.

What is an “Eligible Child”? An eligible child is a child under the age of 18 at the time the qualified adoption expenses is paid. A child who turned 18 during the year is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him or herself is also eligible, regardless of age.

What does a “nonrefundable credit” mean? The adoption credit is a not a refundable credit. So, if the sum of your refundable credits for the year exceeds your income tax liability, the excess will not be refunded to you.

What are the limits to taking the credit? The credit allowable for 2013 is phased out for taxpayers with adjusted gross income (AGI) over $194,580 and is eliminated when the AGI reaches $234,580.

How do I claim the credit? To claim the credit, you would use Form 8839. Taxpayers who file Form 8839 cannot file their returns electronically. Instead they must file a paper return. You must have a taxpayer identification number for the child in order to claim the credit. Taxpayers who are in the process of adopting a child can get a temporary identification number, called an Adoption Taxpayer Identification Number (ATIN), for the child, using a Form W-7A. This will enable the adoptive parents to claim the credit and exclude the qualified adoption expenses. When the adoption becomes final, the parents must apply for a social security number for the child. Once you have a social security number, you would use that number, and not the ATIN, for the child.


Disclaimer:  The material presented in this blog post is not offered as legal or tax advice.  All material is presented solely as educational information.