Ask the Adoption Law Expert: The Federal Adoption Tax Credit

How does the tax credit work? Am I eligible?

Expanding your family is expensive, no matter how you go about it. Because insurance usually covers medical bills, we tend to overlook the fact that a hospital birth can cost up to $25,000. Adopting a child, on the other hand, can cost at least this much, and thousands more - without insurance benefits to claim.

In an effort to reduce the cost of adoption, the federal adoption tax credit was introduced in 1996. It allowed families to deduct up to $5,000 ($6,000 for a special-needs adoption) in qualified adoption expenses from the total amount of taxes they owed. Still, under this law, families with low incomes and little or no tax liability could not take full advantage of the credit. In 2001, the credit was increased to $10,000 per adoption attempt, and the maximum was adjusted for inflation in subsequent years. The 2001 bill also provided a 'flat credit' to families completing special-needs adoptions, which meant that they were eligible for the full credit, regardless of their expenditures.

Adoption tax relief today
In the fanfare surrounding the passage of President Obama's health care bill in March, provisions for the adoption tax credit may have escaped your notice. This act increased the credit to a maximum of $13,170 for 2010, and extended the credit's expiration date to December 2011. It also included an income exclusion, which allows parents to exclude their employer's adoption assistance benefits from their net income.

Most important, the new law made the tax credit refundable, so that lower-income families can claim it. If a family's 'qualified expenses' exceeds their tax liability, they will receive the difference in the form of a tax refund.

Parents can claim both the credit and the income exclusion for qualified expenses, but cannot claim both for the same expenses. For example, if a family spent $15,000 in qualified expenses, it could claim a credit of up to $13,170. And if one parent's employer provided adoption assistance benefits, the family could exclude the remaining $1,830 from their taxable income.

Parents are generally eligible to claim the credit in the year that the adoption is finalized, even if part of those expenses were incurred in the previous year. The income exclusion is generally available in the year the benefits were received, for a domestic adoption, and in the year the adoption became final, for international or special-needs adoptions.

The maximum available credit begins to phase out at a combined income of about $180,000.

What expenses qualify?
'Qualified adoption expenses' are reasonable and necessary expenses directly related to adoption. These include agency/attorney fees, court costs, and travel. Costs that were reimbursed by an employer or were funded under a government program are not eligible. (Parents who adopt a special-needs child can generally claim the credit, even for expenses that fall outside the definition of 'qualified adoption expenses.') Because the credit may be taken for each adoption attempt, costs associated with a failed domestic adoption qualify.

Although it does not eliminate the need for an initial outlay of funds, the tax credit does relieve the financial burden of adoption.

Pass the bucks!
The current adoption tax relief is set to expire in December 2011. Unless there is further legislation, in 2012 the credit will revert to its pre-2001 state.

The good news is that a number of bills before Congress contain provisions that would render the adoption tax credit virtually permanent. Your next step: Once your child is tucked in for the night, head to thomas.loc.gov and find out whether your Congressperson is co-sponsoring any of these bills (search 'adoption tax'). If not, consider writing to him or her describing your adoption experience and the significance of the adoption tax credit. Don't forget to include a thorough list of the costs you incurred -- and a family photo of your sweet, smiling child.

Sign a petition to extend the current tax credit.

This information is intended as a general overview and should not be relied upon as a substitute for the advice of a qualified tax professional.

JANNA J. ANNEST is an adoptive mom and an adoption attorney at Mills Meyers Swartling, in Seattle, Washington. Learn more at annestadopt.com.

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