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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Tax Benefits for Adoptions - a WIN/WIN!

There is no denying the huge need existing in Arkansas and beyond for available foster homes and for families to adopt children in need of a forever home. As I write this, I am thinking of some friends who this very day celebrate "adoption day" in honor of the four they have adopted.

If you have lived around Arkansas very long, you likely have heard of the incredibly important and special organization, The CALL, or Children of Arkansas Loved for a Lifetime. The CALL works tirelessly to help provide foster homes for the vulnerable children who need them, to encourage and promote adoption and to support the wonderful families who do either or both!

To encourage adoption, the US tax code allows for a generous tax credit for which you may qualify, if you are one who answers "the CALL"! 

For 2018, an adoption tax credit can be claimed on up to $13,810 of qualifying expenses per child (i.e., it is not an annual limit per year). This is up from $13,570 in 2017. If, however, the child is a special needs child, the maximum credit is allowed in the year the adoption is final regardless of the actual expenses incurred.

To qualify for the credit, your income must be below certain levels. For this year (2018), the credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) of $207,140 and is eliminated for those with MAGI of $247,140 or more. Like the credit itself, these numbers are indexed for inflation and will change from year to year.

The credit can be taken on each child that you adopt, whether a domestic adoption or international. The child must not have attained the age of 18 as of the time of the adoption, or if older, must be physically or mentally incapable of caring for himself or herself.

To be eligible, the IRS says the expenses must be ones that are "reasonable and necessary" to the adoption, such as fees, court costs, attorney's fees, and other expenses directly related to a legal adoption. This includes travel costs as well.

Expenses that do not qualify include those for which the taxpayer receives funds under any federal, state or local program, which violate federal or state law, which is for carrying out a surrogate parent arrangement or are for the adoption of a child of the taxpayer's spouse.

Further, expenses do not qualify if reimbursed by the taxpayer's employer under an adoption assistance program, however, an employee may claim the credit AND exclusion of benefits received under such a program in the same tax year, as long as the credit and the exclusion does not cover the same qualified adoption expenses.

Determining the year in which the credit can be taken can be confusing and also depends on whether or not the child is a US citizen or resident when the adoption effort begins.

If he or she is a US citizen or resident, you can claim the credit even if the adoption never becomes final as follows:

ï For expenses paid in any year before the year the adoption becomes final, the credit is taken in the year after the year of the payment (the one-year delay rule);

ï For expenses paid in the year the adoption becomes final, the credit is taken in the year the adoption becomes final;

ï For adoption expenses paid in any year after the year the adoption becomes final, the credit is taken in the year of the payment.

If the eligible child is not a U.S. citizen or resident, no credit is allowed unless the adoption becomes final. Because of that, the timing of the credit is a bit different. The credit may be taken for expenses paid DURING or BEFORE the year the adoption is final on the return for the year it is final. The credit for expenses paid after the year the adoption is final is claimed for the year of payment.

While adoptive parents may easily spend double or more the amount of the allowed credit in completing the adoption, if you qualify, the adoption tax credit can definitely help smooth at least the financial transition of adding that special new child to your brood.

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