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Adoption Tax Credit Fact Sheet
The Hope for Children Act (P.L. 107-16) increases the previous $5,000 tax credit for "qualifying adoption expenses" to $10,000. It also increases the employer adoption assistance exclusion to $10,000.
Background and Comment
The original adoption tax credit, effective in 1997, enabled adoptive parents to claim a credit for qualified expenses incurred during the adoption process. As the tax credit was due to expire at the end of 2001, advocates sought to have the law reauthorized and improved. The original bill failed to recognize that families that adopt special needs children face far greater expenses after finalization. The new, expanded bill for adoptions of special needs children includes a flat tax credit of $10,000 (not based on documented expenses), but it did not become effective until January 1, 2003.
This created a disincentive to finalize adoptions of children with special needs during calendar year 2002.
Effectiveness
The Hope for Children Act was effective January 1, 2002, for taxes filed in 2002. Adoptions with documented expenses may claim the full amount for tax year 2002. See previous comment regarding special needs adoptions without documented expenses.
Expiration
The law expires in 2010. Current legislation has been introduced to make the tax credit permanent (HR 4800).
Qualifying Adoption Expenses
According to the IRS, qualifying adoption expenses are "reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging) and other expenses related to, and whose principle purpose is for the legal adoption of an eligible child."
Who Qualifies
People with modified adjusted gross incomes of $150,000 or less, phasing out for the modified adjusted gross incomes up to $190,000 qualify.
Non-special needs domestic adoptions and finalized intercountry adoptions qualify.
Overseas adoptions must be finalized to be legal and for the child to be deemed a U.S. citizen.
Retroactive Adoption Expenses
Domestic non-special needs adoption expenses incurred prior to 2002 do not qualify for the $10,000 tax credit.
Qualifying expenses paid or incurred prior to January 1, 2002, are limited to $5,000.
Domestic special needs adoptions that occurred prior to January 1, 2003, for the year 2002 may qualify for the $10,000 tax credit if the expenses meet the guidelines for qualifying adoption expenses, as described above.
Special Needs Adoptions
On January 1, 2003, the tax credit for domestic special needs adoptions without the requirement to document expenses increased to $10,000.
It is hoped that legislation will again be introduced to allow these adoptions to also be eligible for the $10,000 tax credit for 2002.
Domestic special needs children are defined as children who are U.S. citizens and who, as determined by their state of residence, qualify for Title IV-E adoption assistance.
Intercountry Adoptions
Intercountry adoptions must be finalized. Most intercountry adoptions are finalized in the child's country of birth, however, adoptions from Korea and India are finalized in the United States.
Carry-Over
The credit can be applied against tax liability over six years or whenever expenses reach the $10,000 limit, whichever comes first.
Follow-Up
The updated version of IRS Publication 968 is available on the IRS website at http://www.irs.gov/pub/irs-pdf/p968.pdf (Requires Adobe Acrobat Reader).
Call to Action
Contact your senator and representative. Ask them to support amendments that will make the special needs adoption flat tax credit effective in tax year 2002 and to eliminate the Sunset provision.
- The Child Welfare League of America is not engaged in rendering legal or tax advisory service. Please notify your attorney or other professional advisor for advice or assistance in specific cases.
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