ADOPTION TAX CREDIT

This explanation of the adoption tax credit is meant to alert you to the possibility that you may be entitled to benefit by it. Please consult with a tax professional to determine whether you are eligible. You may also consult IRS Publication 968.

The adoption tax credit is a dollar-for-dollar reduction against tax liability. It may reduce tax liability to zero. However, if the credit is greater than the tax owed, the excess is not refunded. Unused credit can be carried forward for five years or until used, whichever comes first. The maximum tax credit in 2005 is $10,630 and is $10,960 in 2006.

Expenses that qualify for the adoption credit are all reasonable adoption fees, court costs, attorney fees, agency fees (including home study), traveling expenses (including meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.

Expenses for carrying out any surrogate parenting arrangement are specifically excluded. In addition, any expenses which are reimbursed by an employer or received under a federal, state or local program are excluded.

There is an income limit on the adoption credit which is based on modified adjusted gross income (AGI). In 2005, if a person’s AGI is below $159,450, there will not be any limitations. The credit is phased out at incomes between $159,451 to $199,450. In 2006, the phase out range is $1674,410 to $204,410.

A taxpayer can claim expenses (which includes all eligible expenses paid the year prior to and in the year of adoption) as a credit in the year the adoption becomes final. If a qualifying expense is incurred and paid in a year after the year the adoption becomes final, the taxpayer takes the deduction in the year the expense is paid.

There is also a credit for a child with special needs who cannot or should not be returned to the home of his or her parents and a specific factor or condition makes it reasonable to conclude that the child cannot be placed with adoptive parents unless assistance is provided as determined by a state. In order to qualify as a child with special needs, the child must be a citizen or resident of the United States.

In order to take the adoption credit, a taxpayer files Form 8839 with a personal income tax return. Anyone taking the credit should retain all records to substantiate the credit.

Medical expenses of the natural mother cannot be deducted, including expenses incurred in childbirth. Medical expenses paid on behalf of an adopted child can be taken on Schedule A, Itemized Deductions on a personal income tax return once the child is considered a dependent.

A child is a dependent if the child meets five specific tests:

1) The taxpayer provided over 50% of the child’s total support,

2) The child had less than $3,000 of gross income,

3) The child is a U.S. citizen or a resident of Canada or Mexico,

4) The child does not file a joint return, and

5) The child lived in the taxpayer’s house for the entire year (or since birth).

Please consult with a tax professional to see whether you qualify for the adoption tax credit, or two other possible tax credits relating to children:

1) Child Tax Credit, and

2) Credit for Child and Dependent Care Expenses.

LGBT Issues in Spain

William S. Singer, Esq.
Singer and Fedun, L.L.C.
2230 Route 206
P.O. Box 134
Belle Mead, New Jersey 08502

908-359-7872
908-359-0128 (fax)
Wsinger@singerfedun.com