The income eligibility is determined by a
formula but is generally as follows:
The family’s modified gross income is used
to determine the percentage of expenses up to $10,390 that may be credited
$155,860 or
less 100% of actual expenses up to $10,000
$155,861 –
$195,859 Percentage of expenses allowed, up to $10,000, to be credited
is gradually reduced as modified AGI increases
$195,860 or
over No credit is available
The following types of adoptions are eligible:
·
Special Needs Adoptions
·
Independent Adoptions
·
Agency Adoptions
·
Relative Adoptions (except step-parent adoptions)
·
State Agency Adoptions (in Tennessee this is the Department of Children’s
Services)
·
Intercountry Adoptions (only eligible if finalized)
·
Expenses paid pursuing all above types of adoption except intercountry can be
credited even if the adoption is never finalized.
The following types of adoptions are not eligible:
·
Adoptions in connection with surrogacy arrangements
·
Step-parent adoptions
·
Adult adoptions
The maximum
allowable for the adoption of one child is $10,390.
The U.S.
Code states that reasonable, necessary, and legally permissible adoption
expenses are eligible, and the act specifically allows attorney’s fees, court
costs, and other expenses directly related to adoption. The Treasury Department
interpretation goes on to mention adoption fees and travel expenses as well.
“Eligible expenses” is reasonably interpreted to include expenses otherwise
permitted by law such as agency fees, home study fees, counseling fees, medical
expenses and birth parent living expenses. For special needs adoptions, expenses
to prepare for the child such as wheelchair ramps or medical equipment are also
allowable expenses.
The credit
may not be taken before the expense was paid. If the expense was paid in the
year the adoption was finalized, the credit may be taken in that year. This
“year after” situation is unusual. It is related to federal budget accounting
and not to any tax or adoption policy consideration.
For
intercountry adoption, all expenses are taken in the year the adoption is
finalized.
Expenses
paid pre-January 1997 are not allowed no matter when the adoption is finalized.
If the
entire credit cannot be used in the first year, it may be carried forward for up
to five years.
An
enhancement of the special needs tax credit became effective January 1, 2003.
Those adopting special needs children are no longer required to show actual
adoption expenses in order to secure the $10,390 credit.
To apply
for the adoption tax credit, the adoptive family must complete a qualified
adoption expenses form and submit it with their federal income tax return. The
form requires an identification number for the child. This number is the child’s
social security number (SSN), if the child has one or will obtain one before the
tax return must be filed. To apply for the social security number, the adoptive
family must complete an application and submit it to their local social security
office with a certified copy of the child’s birth certificate and a certified
copy of the child’s final decree of adoption.
For domestic
adoptions the adoptive family must apply for an adoption taxpayer identification
number (ATIN) for the child if the adoptive family cannot apply for a social
security number because the adoption is not yet final.
For
intercountry adoptions, the adoptive family must apply for an individual
taxpayer identification number (ITIN). This number is used until the child
becomes a citizen and can obtain a social security number.
Additional information may be found in IRS
Publication 968. http://www.irs.gov/pub/irs-pdf/p968.pdf
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