Adoption Credit Windfall

Written by Peter Tran

July 2, 2017

No one adopts a child “for money.”  To contrary, most see adopting as an act of giving.  A rare act of fiscal atonement recently occurred when Congress changed Adoption Tax edit to give back to those who so generously give of mselves.  se changes are unprecedented and make a large number of adoptive families eligible for substanl tax refunds.  How substanl?  Extraordinary – largest individual edit ever administered by IRS.  At HBS Tax it is not uncommon for us to help qualifying families claim refunds of $30-$40-even $0,000. 

adoption edit was ed to reimburse adoptive parents for qualified adoption expenses and provide tax relief to adoptees of “special needs” children (discussed below).  Prior to 010, edit was nonrefundable – meaning it would reduce tax liability but would not generate a refund.  Although any unused edit could be carried forward, it was lost if not used within five years.  Because edit was not refundable many adoptive parents saw little benefit and did not claim edit or carry it forward.  Recent changes, however, have made it worthwhile to amend se past-year returns to claim edit in 010. 

Changes:  Effective January 1, 010, adoption edit was ineased to $13,170 and made refundable.  Adoptive parents can now receive edit even if y owe no income tax.  This refund-ability also applies to any edit carried over to 010 from a previous tax year.  edit will also remain refundable for adoptions occurring in 011. 

Qualifying Children: To qualify for edit/exclusion, adoptive child must be an “Eligible Child” or a “Special Needs Child”.  An “eligible child” is eir under age of 18 or a person physically or mentally unable to take care of his or herself.  A “special needs child” is defined as an eligible child who meets three additional iteria: (1) Be a citizen or a resident of United States or U.S. possession.  () A state agency must determine that child should not or cannot be returned to ir parent’s .  (3) state must also determine that a specific factor (such as child’s age, ethnic background, medical condition or handicap) makes adoption unlikely without assistance.  primary difference between adopting an eligible child or a special needs child (as it pertains to adoption edit/exclusion) is that edit for an “eligible child” is limited to qualified expenses actually spent on adoption.  edit for adopting a “special needs child,” on or hand, is full edit amount ($13,170 in 010) regardless of amount actually spent.

Qualified Expenses: Qualified adoption expenses include adoption fees, attorney fees, travel expenses and re-adoption fees for a foreign child.  y do not include expenses paid or reimbursed by government programs, costs associated with surrogate parenting, or cost of step-parent adoptions.  If adoption is a “foreign adoption” edit/exclusion is only allowed if adoption becomes final.  If child is a U.S. citizen or resident, edit is allowed wher or not adoption is successful.  edit/exclusion limit is a per-child/adoption limit, not an annual limit. 

Those who claim edit should be prepared to wait for ir refunds for a number of months.  y should also amend any prior-year returns related to edit prior to filing ir year return.  IRS was apparently blindsided by number of families who qualify for edit as well as size of refunds being claimed.  As a result, every return claiming edit is subject to special audit procedures.

In this article, I have discussed some major changes to adoption edit.  I have not discussed many of edit’s complexities such as limits on filing status and income limitations of those claiming edit or impact of employer adoption assistance.  As always, do not rely on this information as a basis to make any financial decisions.  Feel free to contact our office to consult with a tax professional.

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