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Adoptive Parents and the Adoption Tax Credit

March 2010

If adopting a child is in your thoughts (and on your heart), you should know about the adoption tax credit that the federal government offers to adoptive parents of eligible children, particularly special needs children.

The adoption credit is particularly attractive and valuable, since, instead of being deducted from your taxable income, it is an actual dollar-for-dollar tax reduction of up to $13,170 per child (for tax years 2010 and 2011).

As is the case with most tax-related issues, the particulars of the adoption credit can be a little confusing. However, generally speaking, adoptive parents who paid qualifying expenses in the current year for an adoption that became final in the current year may be eligible to claim the credit for the expenses on the current year return, in addition to credit for expenses paid in a prior year.

“Qualifying expenses” include reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to, and for which the principal purpose is, the legal adoption of an eligible child.

An “eligible child” must be under 18 years old or, if older, be physically or mentally incapable of caring for himself or herself.

In the case of a U.S. child, you can claim the credit even if your adoption of the child fails. However, if your adoption involves a foreign child, you can take the credit only if the adoption is completed.

Special Needs Children. Persons adopting a special needs child may be eligible to take the maximum credit, even if the actual adoption-related expenses are less than that amount, if:

• the child is otherwise eligible for adoption,

• the child is a U.S. citizen or resident, and

• the State determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided.

In Arizona, the criteria for a special needs child are specified in statute (see A.R.S. § 8-141).

Limitations. Here are some restrictions to keep in mind.

First, the income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. If your modified AGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. If your modified AGI is above the maximum phase out amount for the year, your credit or exclusion will be eliminated. The credit is reduced if your modified adjusted gross income is between $174,730 and $214,730. You can't claim either the credit or the exclusion if your modified adjusted gross income is $214,730 or more.

Also, if you are married, you generally must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements.

Third, the adoption credit is generally not available for any reimbursed expense (exceptions may exist with respect to special needs children).

Finally, in addition to the credit, certain amounts paid by your employer for qualifying adoption expenses may be excludable from your gross income.

Note: The information in this article is general in nature and should not be relied upon as specific tax advice. To determine how adoption tax credits and exclusions apply to your situation, please contact a tax professional.