In the next few weeks, we will be sharing a series of posts about the Adoption Tax Credit, written by Rob Pederson. Rob is a CPA with 11 years of experience – 4 in public accounting as an auditor and tax preparer, and 7 in the accounting departments of two publicly traded companies. He also owns and write for getyourcpa.com, a site that helps accountants pass the CPA exam and offers career advice.
Adoption Tax Credit
Filing for the adoption tax credit can be tricky. It is best to work with a qualified and experienced tax preparer when taking advantage of the tax benefits of adoption. That said, it is also important that you have a firm understanding of the rules so you can discuss your taxes intelligently with your preparer and can make an educated choice when selecting someone to do your taxes.
There are a number of hoops you have to jump through to determine the amount of the adoption credit you qualify for. You have to have made the right kind of adoption, incurred specific types of costs, and filed all the appropriate paperwork.
The maximum credit for 2009 was increased to $12,150, so it is definitely worthwhile to pursue this credit despite the complexity.
What Types of Adoptions Qualify?
To tax advantage of the adoption credit, the child you adopt must either be under 18 years old or be incapable of caring for him or herself due to physical or mental limitations. Adoptions of your spouse’s child do not qualify for the credit.
What Costs Qualify?
Costs that qualify for the credit include adoption fees, court costs, legal fees, travel expenses, meals and lodging while away from home, and other expenses directly related to the adoption. Make sure you discuss any expenses in the "other" category with your tax preparer, even if you think they might be a long shot. If you have a legitimate argument about costs you incurred specifically for the adoption, you should be able to deduct them.
In addition, if your employer provides adoption benefits, you can exclude $12,150 from your income in addition to claiming the tax credit if your expenses exceed your adoption benefits paid by your employer. For example, if an adoption costs you $20,000 total and your employer pays for $12,150 of the adoption, you can exclude that $12,150 from your income so it is not taxed and you can claim a credit of $7,850 for your additional expenses over an above your employer reimbursement ($20,000 total cost minus $12,150 employer benefit).
The $12,150 is cumulative for each adoption effort. If one adoption takes 3 years, your limit is $12,150, not $36,450. If you take a credit of $10,000 in year 1, you have $2,150 remaining to take in subsequent years if it is related to the same adoption effort.
What Costs Do Not Qualify?
Amounts paid to adopt your spouse’s child or to a surrogate mother are not deductible. In addition, any costs resulting from illegal activities are not deductible (e.g. bribing an official). Costs you may have been reimbursed for by an employer or other party do not qualify for the credit, but may qualify for an income exemption.