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Adoption Tax Credit Update

by Dan Cruver Published Mar 31, 2010

The following helpful article was written by John M. Hine (The Hine Law Firm, LLC) and Laura Beauvais-Godwin (Director of Nightlight Christian Adoptions in SC):

Adoption Tax Credit

By John M. Hine, Esq. and Laura Beauvais-Godwin

Great news: The adoption tax credit has been extended for one more year, has increased, and you could get a tax refund!!!

The Adoption Tax Credit has been extended another year, and starting this year, it has increased to $13,170. So if you adopt this year or next, you can receive not only a tax credit of $13,170 but for the first time, the tax credit is refundable. Except for the increase in the amount of credit you receive and the fact that the tax credit is refundable, the previous rules remain essentially the same.

What this means to you, the adoptive families:

The adoption tax credit will not sunset on December 31, 2010, it has been extended to December 31, 2011.

You may apply up to $13,170 of your adoption expenses toward your federal taxes when you file your 2010 or 2011 taxes, depending up the year that your adoption was finalized.

If you do not receive the full $13,170 in tax credit, you may be getting money back from the IRS for your adoption expenses. Yes, money back. If your tax liability for the year of your adoption is less than the amount of credit you are applying for, the IRS will refund the portion of the unused credit. This means you could receive some or all of the balance as a refund on your federal taxes. The Earned Income Credit is an example of another refundable tax credit.

What if I adopt 2 children? Do I get double the tax credit/refund?

If you adopt two children, you could have a tax credit up to $26, 340 if your total expenses came to $26,340 or more. It is important to note that if your income is too high, you could be phased out of the tax credit. However if your income is low enough, and you paid $26,340 or more in adoption related expenses, you could get a tax credit and a refund. If you adopt three children, the credit/refund could be as high as $39.510, as long as your adoption-related expenses are that high.

This means that if you adopted two children and the adoption fees and expenses came to $30,000, and your federal tax liability was $7,000, you would receive the $7,000 as a credit against your liability; in addition, you could receive the remaining $19,340 back in a refund from the IRS even though you did not pay that in taxes.

What if my employer provides adoption benefits?

If your company has employer-provided adoption assistance, you can receive up to $13,170 in tax-free income. Also, your employer can reduce your salary to pay the adoption benefit so that you can receive tax-free income. This is even more attractive this year because, for the first time, you do not have to pay a lot in taxes to really see the benefit of the credit because you would get a refund for what you do not get in a tax credit.

So if your adoption expenses, including all agency/attorney fees, come to $30,000, and your employee gives you $10,000 as an employee benefit, which is tax-free, and you pay $3,000 in federal income tax, then you could offset your tax liability with $3,000 from the tax credit; you could then receive the remaining $10,170 as a refund. That means that you receive in this scenario $20,170 in employer benefits and a refund plus $3,000 in a tax credit.

We encourage you to talk with your employer, who may not normally offer adoption benefits, to consider providing this benefit to you. You are permitted to reduce your salary by up to $13,170 and instead be given this benefit as non-taxable income. So if your adoption fees and expenses come to $28,000, and your employee gives you $13,170 in tax-free income, you will most likely save in taxes owed overall to the State, to social security, and Medicaid as well as to the federal government. If you are adopting siblings, the employer-provided benefits can double or triple, based on the number of children you are adopting. In addition to receiving tax-free income, you can also receive up to $13,170 as a tax credit and/or refund for your remaining adoption expenses.

If your company is the rare employer who provides more than $13,170 in adoption benefits, then the remaining benefit over $13, 170 is taxable. So if you receive $15,000 in adoption benefits, you will have to pay taxes on the $1,830.

When is a family’s income too high to get the tax credit?

As of last year, the credit began to phase out once a taxpayer’s modified adjusted gross income (AGI) reached $182,180. The credit completely phased out at a modified AGI at $222,180. This means that you cannot claim the credit or employee benefit exclusion at all once your modified AGI is $222,180.

Both the amount of the credit and the phase out are adjusted for cost of living increases. Please speak with your local tax professional for the exact amounts based on the timing of your adoption.

What about failed adoptions?

If you adopt domestically and the adoption fails, then you can take the adoption tax-credit the year after your adoption has failed. So if this year (2010), you are in the process of adopting domestically, and spend $7,000 on adoption related fees and birth mother living expenses and the birthmother changes her mind, you can take the tax credit of $7,000 when you file your 2011 taxes in 2012. If you pay, for example, $3,000 in federal income taxes, you may be able to receive the other $4,000 as refund from the IRS. Of course, you have to wait until 2012 to receive those funds.

What about adopting children with special needs?

The special provisions for those adopting children with special needs who pay minimal or no adoption related fees may still be eligible for the tax credit if the adopted children are placed through social services or an agency with a contract with social services.

John M. Hine is a solo practitioner in Greenville, SC whose practice focuses on Complex Estate Planning and Tax Law. Upon earning his Juris Doctor at the University of South Carolina School of Law, he went on to receive a Master of Laws in Taxation (LL.M.) from the University of Florida, Levin College of Law.

Laura Beauvais-Godwin, MPH, is the director of Nightlight Christian Adoptions in SC.

Special Note: The Hine Law Firm, LLC is in no way affiliated with Nightlight Christian Adoptions. This content is intended to be used for informational purposes only and does not constitute legal advice in any way. As with any legal or accounting advice, consult with your attorney and accountant about your personal situation.

  • Jon

    Awesome info, thanks!

  • Robert

    Was this extension built into the health care bill or was this separate?

  • Amanda

    Do you know how this will effect the people like us who adopted in 2008 and 2009 and have not used their full credit that we are carrying forward? Also we plan to have another finalized adoption in 2010. Any advise would be greatly appreciated.

    Thank you!

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