October 5, 2009
For several weeks, we have and 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. Find the first two articles in this series here and here.
How Do You Claim The Credit?
If you are "married filing separately," there are several criteria you have to meet before you are eligible to claim the credit. You have to have lived apart from your spouse during the last 6 months of the year, the adopted child had to have lived in your home for at least 6 months of the year, and you have to have provided at least 50% of the costs of keeping up your home. If you do not meet these 3 criteria, you cannot claim the credit if you are "married filing separately." No other filing statuses have restrictions.
To claim the adoption credit, you need to fill out Form 8839. On the form, there are income limits where the tax credit gets phased out. Whether you are single or married, the income limits are the same. The phase out starts at a modified adjusted gross income (mAGI) of $182,180 for 2009. The credit is completely phased out at a mAGI of $222,180. Your mAGI is your adjusted gross income at the bottom of the front page of your 1040 plus employer provided adoption benefits (box 12 of W-2 with code T) plus certain foreign income reported on Form 2555.
The phase out works on a pro-rated basis for every dollar you are above the $182,180 level. As an example, if your mAGI is $190,000, you are $7,820 above $182,180. The total range of the phase out is $40,000 ($222,180 minus $182,180). Divide $7,820 by $40,000 to get approximately 20%. In this case, 20% of the credit that would otherwise be available to you is disallowed. If you had $10,000 of eligible adoption expenses, you would only get a credit of $8,000.
Records to Keep
Keep all of your receipts. Keep a travel log of all you miles driven. You should also keep a spreadsheet or some sort of list of all of your expenses, with the actual receipts as backup. The IRS holds to the concept of “contemporaneous documentation,” meaning you should be keeping a log and other documentation at the same time the activity is happening (e.g. log your miles driven right after your trip). You should not be waiting until you file your tax return or get audited to pull together the documentation.
In addition, you should keep anything that proves your efforts to adopt, especially if the adoption is unsuccessful. This could include any correspondence, including emails, to and from lawyers and adoption agencies, travel itineraries, or any other documentation that would prove to someone you went through good faith efforts to adopt a child.
These documents usually do not need to be filed with your tax return but they should be kept in a safe place so you can provide them to the IRS if there are any questions about your return.