Adoption Tax Credit

In 1997, after much lobbying by adoption advocate groups, including the invaluable support of the National Council for Adoption (for which Lifeline Children's Services is a long-standing member), the adoption tax “credit” became law.

In 2002, Congress passed parts of President Bush’s tax incentive package.  One of the laws that passed was the increase of the Tax Adoption Credit from $5,000 to $10,000 with a 5 year carry forward.  The law was co-sponsored by one of Alabama’s US Congressmen, Spencer Bachus, who came to celebrate the signing on the lawn at Lifeline.  For 2006, the tax credit was $10,960.

Beginning in 2007, the credit allowed for an adoption of a child with special needs is $11,390 and the maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $11,390. The credit begins to phase out if you have modified adjusted gross income of $170,820 or more and is completely phased out if you have modified adjusted gross income of $210,820 or more.

Adoption Tax Credit 2009:  The Internal Revenue Service (IRS) released new figures related to the Adoption Tax Credit and Adoption Assistance Program on October 16th.  For 2009, both the amount that adoptive parents are permitted to claim under the Adoption Tax Credit and the amount to be excluded from an employee's gross income for qualified adoption expenses incurred under an employer-provided adoption assistance program are set at $12,150.  Also for 2009, the income eligibility phase-out range for both programs has been adjusted to $182,180 - $222,180, with individuals earning more than $222,180 ineligible for either program.  These adjustments are the result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provisions that said amounts and income limitations be indexed for inflation each year beginning in 2003.

For the credit, qualifying expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling 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 be physically or mentally incapable of caring for himself.

A tax credit is different from a deduction, in that a tax credit offsets a taxpayer’s tax liability, wherein a deduction offsets income from a taxpayer’s adjusted gross income to come to taxable income.  A tax credit therefore is much more advantageous than a deduction.  Essentially the tax credit is a refund of applicable taxes to offset the cost of adoption.  To put this in layman’s terms your tax dollars go to an adoption agency, attorney, airline, etc. instead of the Federal government.

For example: John and Jane Doe adopt a child in 2004.  John and Jane incur $15,000 in eligible adoption expenses.  In 2004 their tax liability on their Form 1040 was $11,000, and they had $10,000 withheld from their paychecks during the year.  In a normal year without the adoption tax credit they would expect to pay $1,000 to the Federal government before April 15; however, with the adoption tax credit they are permitted to take because of the adoption of their child, the tax liability is reduced to $40, which means they will get a refund of tax withheld of $9,960.  Instead of paying the government in taxes, their tax dollars where used towards their adoption.

The law is very helpful to families with lower incomes, in that any part of the credit not taken in year one, may be carried forward for five years.  This helps families also plan their adoption expenses with low interest loans that can be paid off when taxes are offset at the end of the year.

For example: John and Jane Doe adopt a child in 2004.  John and Jane incur $15,000 in eligible adoption expenses.  In 2004 their tax liability on their Form 1040 was $3,000, and they had $2,000 withheld from their paychecks during the year.  In a normal year without the adoption tax credit they would expect to pay $1,000 to the Federal government before April 15; however, with the adoption tax credit they are permitted to take because of the adoption of their child, the tax liability is reduced to $0, which mean they will get a refund of tax withheld of $2,000.  Instead of paying the government in taxes, their tax dollars where used towards their adoption, and since they only used $3,000 of the tax credit in 2004, they have $7,960 to carry forward to offset tax liability in  2005 and forward until the credit is used or five years have passed.

While all families may not be able to recoup the entire $10,960 your personal accountant or Lifeline representative can help you figure an estimate of how much you should be able to receive within the allowable time period.  To view the IRS tax topic go to http://www.irs.gov/taxtopics/tc607.html and to view the IRS publication go to http://www.irs.gov/publications/p968/ar01.html.

Revised: 03/07