Adoption Tax Credit Guidelines
The United States government wants citizens to adopt, and Congress passed the Affordable Care Act in March 2010 to offer them more financial incentive. The act raised the tax credit to help new parents afford the many associated costs of adoption. It allows you to deduct what you spent on the adoption process from your tax liability, and can possibly result in a refund to you, as long as your adoption expenses meet qualifications.
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Amount of Credit
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You can claim the adoption tax credit for up to $13,750 of your adoption expenses as of August 2011, even if your adoption effort was unsuccessful for some reason. If you spent $10,000, your credit is $10,000. However, if you adopt a special-needs child, you can usually claim the entire $13,750, whether you spent that much on the process or not. A special-needs child is one certified by the state in which she lives because some condition exists that makes her adoption unlikely without some incentive provided to the parents. For example, she may be disabled or an older child. The court must also determine that reunification with her parents isn't safe or isn't possible.
Income Limitations
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Although the credit is a boon for most families, some with higher incomes won't qualify. If your modified adjusted gross income (MAGI) is in excess of $182,520 as of August 2011, you can only claim a partial credit for what you spend to adopt a child. Your MAGI is your income after all possible deductions, including any costs your employer may have contributed to your adoption efforts. Your MAGI also subtracts any passive income you received, such as through dividends and interest. Your MAGI is usually lower than your adjusted gross income, but if it comes to $222,520 or more, you can't claim the credit at all.
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Other Limitations
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Expenses must be "qualified" to count toward your credit. You can't use expenses incurred because you adopted your spouse's child, or costs associated with a surrogate pregnancy arrangement. You're generally limited to attorney fees, court costs, travel expenses and other fees directly linked to the adoption process.
How to File
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You can't claim the credit if you're married and file separate returns. You must file a joint return, and you can't file it electronically because you must attach documented proof of the adoption. This proof may be the adoption decree or other supporting court papers. If you adopt a special-needs child and want to claim the entire credit, you must also attach documentation from his state confirming his special-needs status. To claim the credit, complete IRS Form 8839 and attach it to your return, along with your other paperwork. Then enter the amount of your credit on Line 52, Box B of your Form 1040.
Considerations
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Tax laws are frequently subject to change. The $13,750 adoption tax credit is good only through December 2011. If you adopt after that, check with a tax professional to find out if the law has been altered or renewed.
The adoption tax credit is also refundable. This means that if you owe the IRS $2,000 in taxes in the year you use the credit, and if you're entitled to the entire $13,750 credit, the IRS will send you an $11,750 refund. The credit is first applied to your tax liability, and the remainder is yours.
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References
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