adoption tax credit

Adoption Tax CreditsAdoption Tax CreditsMichael L. DeVries, CFPMichael L. DeVries, CFP®®, CHBC, EA, CHBC, EA

Adoption Tax BenefitsAdoption Tax Benefits

Federal Tax CreditFederal Tax Credit Adoption Assistance ProgramAdoption Assistance Program State of Michigan Tax CreditState of Michigan Tax Credit

Federal Tax CreditFederal Tax Credit

Qualified Adoption Expenses Qualified Adoption Expenses Credit up to $11,390 – year 2007Credit up to $11,390 – year 2007 Dollar for dollar reduction of taxDollar for dollar reduction of tax

Qualified Adoption ExpensesQualified Adoption Expenses

Reasonable and necessary adoption feesReasonable and necessary adoption fees Court costsCourt costs Attorney feesAttorney fees Traveling expenses (including amounts Traveling expenses (including amounts

spent for meals and lodging) while away spent for meals and lodging) while away from homefrom home

Other expenses directly related to the Other expenses directly related to the legal adoption of an eligible child.legal adoption of an eligible child.


Not Expenses…Not Expenses… Connected with the adoption of a child of a taxpayer's Connected with the adoption of a child of a taxpayer's

spousespouse Of carrying out a surrogate parenting arrangementOf carrying out a surrogate parenting arrangement That violate state or federal lawThat violate state or federal law Paid using funds received from a federal, state, or local Paid using funds received from a federal, state, or local

programprogram That are reimbursed by an employerThat are reimbursed by an employer But, benefits provided by an employer under an adoption But, benefits provided by an employer under an adoption

assistance program may qualify for the exclusion. assistance program may qualify for the exclusion.


Expenses in connection with an Expenses in connection with an unsuccessful attempt to adopt an eligible unsuccessful attempt to adopt an eligible child before successfully finalizing the child before successfully finalizing the adoption of another child can qualify. adoption of another child can qualify.

Expenses connected with a foreign Expenses connected with a foreign adoption (i.e., one in which the child isn't a adoption (i.e., one in which the child isn't a U.S. citizen or resident) can only qualify if U.S. citizen or resident) can only qualify if the child is actually adopted. the child is actually adopted.


Taxpayers who adopt a child with special needs Taxpayers who adopt a child with special needs will be deemed to have qualified adoption will be deemed to have qualified adoption expenses in the tax year in which the adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring becomes final in an amount sufficient to bring their total aggregate expenses for the adoption their total aggregate expenses for the adoption up to $11,390 for 2007. up to $11,390 for 2007.

They can take the adoption credit or exclude They can take the adoption credit or exclude employer-provided adoption assistance up to employer-provided adoption assistance up to that amount, whether or not they had $11,390 that amount, whether or not they had $11,390 actual expenses. actual expenses.

Eligible ChildEligible Child

Child under the age of 18 at the time the Child under the age of 18 at the time the qualified adoption expense is paidqualified adoption expense is paid

If the child turned 18 during the year, the If the child turned 18 during the year, the child is an eligible child for the part of the child is an eligible child for the part of the year he or she is under age 18year he or she is under age 18

A person who is physically or mentally A person who is physically or mentally incapable of caring for himself is also incapable of caring for himself is also eligible, regardless of ageeligible, regardless of age

Special Needs ChildSpecial Needs Child

Child whom the state has determined cannot or Child whom the state has determined cannot or should not be returned to his parents and who should not be returned to his parents and who can't be reasonably placed with adoptive parents can't be reasonably placed with adoptive parents without assistance because of a specific factor without assistance because of a specific factor or condition, e.g., ethnic background, age, or condition, e.g., ethnic background, age, membership in a minority group, medical membership in a minority group, medical condition, or handicap.condition, or handicap.

Only a child who is a citizen or resident of the Only a child who is a citizen or resident of the U.S. can qualify as having special needs. U.S. can qualify as having special needs.

Employer Adoption AssistanceEmployer Adoption Assistance

Also, adoptive parents may be able to exclude from their Also, adoptive parents may be able to exclude from their gross income up to $11,390 of qualified adoption gross income up to $11,390 of qualified adoption expenses paid by an employer under an adoption expenses paid by an employer under an adoption assistance program. The credit is nonrefundable and assistance program. The credit is nonrefundable and both the credit and the exclusion are reduced (phased both the credit and the exclusion are reduced (phased out) if the parents' income exceeds certain income limits. out) if the parents' income exceeds certain income limits.

Adoptive parents may claim both a credit and an Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they may exclusion for expenses of adopting a child. But they may not claim both a credit and an exclusion for the same not claim both a credit and an exclusion for the same expense. expense.

When to Claim the CreditWhen to Claim the Credit

If the qualifying expenses are paid before If the qualifying expenses are paid before the year the adoption becomes final, the the year the adoption becomes final, the credit is claimed for the year after the one credit is claimed for the year after the one in which the expenses are paid. in which the expenses are paid.

If the expenses are paid in the year the If the expenses are paid in the year the adoption becomes final or in a later year, adoption becomes final or in a later year, the credit is claimed for the year in which the credit is claimed for the year in which the expenses are paidthe expenses are paid

ExampleExample

$3,000 was paid in 2004$3,000 was paid in 2004 $2,000 in 2005$2,000 in 2005 $4,000 in 2006$4,000 in 2006 Adoption is Final in 2006Adoption is Final in 2006

The taxpayer claims a $3,000 credit in 2005 (for The taxpayer claims a $3,000 credit in 2005 (for the 2004 expenses).the 2004 expenses).

The $2,000 of 2005 expenses and the $4,000 of The $2,000 of 2005 expenses and the $4,000 of 2006 expenses are combined to be claimed in 2006 expenses are combined to be claimed in 2006. 2006.

When to Claim ExclusionWhen to Claim Exclusion

Employer-provided adoption benefits are Employer-provided adoption benefits are excluded from the employee's gross excluded from the employee's gross income for the year in which the employer income for the year in which the employer pays the qualified adoption expense. pays the qualified adoption expense.

In the case of a foreign adoption, neither In the case of a foreign adoption, neither the credit nor the exclusion may be taken the credit nor the exclusion may be taken until the year in which the adoption until the year in which the adoption becomes final. becomes final.

Credit is NonrefundableCredit is Nonrefundable

The amount of the credit can't exceed the The amount of the credit can't exceed the sum of your regular and alternative sum of your regular and alternative minimum tax, reduced by the sum of your minimum tax, reduced by the sum of your other nonrefundable creditsother nonrefundable credits

The credit can reduce your taxThe credit can reduce your tax The amount of credit in excess of your tax The amount of credit in excess of your tax

will not be refundedwill not be refunded

Income LimitsIncome Limits

The credit allowable for any year is phased out The credit allowable for any year is phased out for taxpayers with adjusted gross income (AGI) for taxpayers with adjusted gross income (AGI) over $170,820 for 2007 and is eliminated when over $170,820 for 2007 and is eliminated when AGI reaches $210,820 for 2007. The credit is AGI reaches $210,820 for 2007. The credit is reduced by a percentage equal to the excess of reduced by a percentage equal to the excess of AGI over $170,820 divided by $40,000. AGI over $170,820 divided by $40,000.

The phase-out rules for high-AGI taxpayers The phase-out rules for high-AGI taxpayers apply for the exclusion as well. apply for the exclusion as well.

How to ClaimHow to Claim

Adoptive parents who paid qualified Adoptive parents who paid qualified adoption expenses or who received adoption expenses or who received employer-provided adoption benefits must employer-provided adoption benefits must use Form 8839 to compute the amount of use Form 8839 to compute the amount of the credit and the amount of benefits that the credit and the amount of benefits that may be excluded from their gross income. may be excluded from their gross income.

How to ClaimHow to Claim Need valid Taxpayer Identification Number (Social Security Need valid Taxpayer Identification Number (Social Security

Number) Number)

IRS can disallow the credit and the exclusion if a valid taxpayer IRS can disallow the credit and the exclusion if a valid taxpayer identification number (TIN) for the child is not included on the identification number (TIN) for the child is not included on the returnreturn

Taxpayers can get what is in effect a temporary identification Taxpayers can get what is in effect a temporary identification number for a child they are in the process of adopting. This form number for a child they are in the process of adopting. This form of TIN, called an adoption taxpayer identification number (ATIN), of TIN, called an adoption taxpayer identification number (ATIN), enables the adoptive parents to claim the credit and exclusion for enables the adoptive parents to claim the credit and exclusion for qualified adoption expenses. Form W-7A is used to get an ATIN. qualified adoption expenses. Form W-7A is used to get an ATIN.

When the adoption becomes final, the adoptive parents must When the adoption becomes final, the adoptive parents must apply for a social security number for the child and, once apply for a social security number for the child and, once obtained, the social security number, rather than the ATIN, must obtained, the social security number, rather than the ATIN, must be used. be used.

Dependency DeductionDependency Deductionand Other Benefitsand Other Benefits

Your legally adopted child will qualify as your dependent Your legally adopted child will qualify as your dependent if the other dependency tests are met, e.g., you provide if the other dependency tests are met, e.g., you provide more than half of the child's support. more than half of the child's support.

Even if the adoption isn't yet final, the child will be your Even if the adoption isn't yet final, the child will be your dependent is if he or she was placed with you for legal dependent is if he or she was placed with you for legal adoption by an authorized placement agency and was a adoption by an authorized placement agency and was a member of your household for at least part of the year. member of your household for at least part of the year.

Special requirements apply to adoptions of foreign Special requirements apply to adoptions of foreign children who aren't U.S. citizens or residents. children who aren't U.S. citizens or residents.

Once child is your dependent, you will qualify for the Once child is your dependent, you will qualify for the dependency deduction and for other tax benefits, such dependency deduction and for other tax benefits, such as the child tax credit. as the child tax credit.

State of Michigan State of Michigan Adoption Tax CreditAdoption Tax Credit

Eligible taxpayer can claim a credit equal Eligible taxpayer can claim a credit equal to the taxpayer’s qualified adoption to the taxpayer’s qualified adoption expenses that exceed the amount of the expenses that exceed the amount of the federal tax credit, or $1,200 per child, federal tax credit, or $1,200 per child, whichever is less.whichever is less.

Refundable CreditRefundable Credit

State of Michigan State of Michigan Adoption Tax CreditAdoption Tax Credit

Eligible TaxpayerEligible Taxpayer is a taxpayer that is a taxpayer that claimed a credit under IRC claimed a credit under IRC § 23 for the § 23 for the same tax year that the taxpayer is claiming same tax year that the taxpayer is claiming the Michigan adoption expenses credit.the Michigan adoption expenses credit.

Qualified adoption expenses are expenses that are eligible to be used under the federal IRC § 23.§ 23.

Adoption Tax CreditAdoption Tax Credit

Notice:Notice:To ensure compliance with Treasury Department To ensure compliance with Treasury Department regulations, please be advised that any tax regulations, please be advised that any tax advice that may be contained in this advice that may be contained in this communication is not intended or written to be communication is not intended or written to be used, and cannot be used, for the purpose of (i) used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or law provisions or (ii) promoting, marketing or recommending to another party any tax-related recommending to another party any tax-related matters addressed herein. matters addressed herein.

adoption tax credit

Economy & Finance