Adoption Has So Many Benefits – Why Not Taxes As Well?
Adoption Tax Benefits: Credits & Deductions
The last thing on a future parent’s mind of an adopted child is what benefits, beyond the impact on a child’s life, might be available. However, with the rising need for adoption, coupled with the rising costs associated with the process, it’s nice for individuals to know there is some monetary relief out there. This relief comes in the form of federal and a state tax credits as well as various deductions designed specifically for taxpayers who adopt. As CPAs, enrolled agents and any other registered tax agent know, these credits and deductions can save taxpaying parents a significant amount of money come tax time.
One of the most significant changes this season involved the Affordable Care Act, which recently increased and expanded the adoption tax credit to go up to $13,170 for qualified expenses resulting from adopting a child. Additionally, there are many details about the credit that can make an impact on how a taxpayer can make it work to their benefit.
Adoption Credit: Five Quick Tips
Below are five key elements of the adoption credit, including some of the new expansion rules that will help maximize the potential benefit to taxpayers.
Income Limits – There is a tiered structure for qualifying income levels based on the modified adjusted gross income (MAGI):
If modified AGI is less than $182,520, taxpayers should be eligible for the full credit
If greater than $182,520, the credit allotted is reduced
If modified AGI is $222,520 or greater, taxpayers will not be eligible for the credit
Refundable – One large change is that starting in 2010, even if taxpayers owe little to no taxes, the credit is refundable to the taxpayer.
Expenses – Adoption expenses that qualify are considered “reasonable and necessary expenses” and must be directly related to the child’s adoption
Child Eligibility – Child eligibility is measured in two ways: Either the child is under the age of 18, or medically determined to be incapable of caring for themselves.
Paperwork – Unlike most credits, which are standard line items that can be part of an electronic filing, starting in 2010, the adoption credit form must be completed on paper with attached supporting documentation.
State Benefits – In addition to the credits available, 15 states actually give a fairly substantial tax deduction allotment for parents of adopted children. For example, the state of Massachusetts allows residents to claim a large exemption for adoption agency fees that the taxpayer incurred. Tax professionals should check for similar state benefits for clients
When To Claim – It is important to remember that deductions are not as big a savings as tax credits when looking into the total benefits of filing. With that said, taxpayer deductions (in many cases) can be claimed even if the adoption is not finalized until the following year as long as the child is placed with parent.
For tax preparers, uncovering information about the new expansions and new rules in advance can be as easy as signing up for the many tax CPE courses and tax continuing education classes that cover this material as part of the effort to help tax professionals stay on top of their game. In addition, there are now a host of enrolled agent course guides and enrolled agent books that specifically focus on unique credits and allowances such as the ones highlighted above. Although the adoption process and can overwhelming for many parents, getting the tax benefits doesn’t have to be.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.