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Adoption tax breaks help cover costs of adding to your family

This post was updated March 27, 2018.


If you've been paying attention to Donald Trump Jr.'s meeting with some Russians last summer, you know the White House has given two reasons for the get-together. The explanation that caught my tax eye was that the group talked about adoptions.

The president's oldest son said that one of the Russian nationals came to Trump Tower to lobby for reversal of the Magnitsky Act. The law gets its name from attorney Sergei Magnitsky, who died in 2009 while being held in a Moscow prison.

Foreign fight, domestic family effects: In 2012, the U.S. law bearing Magnitsky's name was enacted. It froze the assets and banned entry of 18 Russian officials believed involved in corruption that Magnitsky helped expose. Russia retaliated by banning U.S. citizens from adopting Russian children.

Mention of Magnitsky immediately reminded me of his conviction on tax evasion charges by a Russian Court — two years after he died.

The talk of adoption also got me thinking about the tax breaks available to U.S. citizens who use this legal process to add to their families. And Uncle Sam's help is definitely welcome, so it's this week's Weekly Tax Tip.

Tax help for costly family additions: Data compiled by the Child Welfare Information Gateway found that in 2016 parents who work with a private agency to adopt a newborn, either domestically or from another country, could pay as much as $40,000.

That's a whole lot of money. However, the Internal Revenue Code offers a couple of options to help eligible adoptive parents cover some of those expenses.

Some employers provide a tax-free adoption benefit. There's also a sizable adoption tax credit.

For the 2017 tax year, a company can provide eligible employees up to $13,570 in tax-free assistance to go toward adoption costs. The amount is adjusted annually for inflation.

In addition, parents in 2017 can claim an adoption tax credit of $13,570 when they file their returns.

For 2018 tax year planning, the adoption tax credit and workplace assistance amount goes to $13,810.

Some tax break restrictions: The good news for people seeking to add to their families via adoption is that this tax credit — which provides a dollar-for-dollar reduction in any tax liability — is per child.

The slightly bad news is that the adoption tax credit is nonrefundable. That means it can only erase the amount of tax you owe, not get you a refund if the credit is more than your tax bill.

Still, zeroing out a tax bill is always a good thing. And there's a silver tax lining. Any excess tax credit may be carried forward for up to five years.

Depending on the adoption's cost, you may be able to claim both the tax credit and the income exclusion from your employer.

However, you must use any allowable exclusion amount before you file for the adoption tax credit. And you can't double dip; that is, you cannot claim both the credit and exclusion for the same expenses.

Income limits tax benefits: Both the tax-free employer provided adoption assistance and the tax credit also are affected by the new parents' earnings.

The amount of both tax breaks begins to phase out when the new adopting taxpayer's modified adjusted gross income (MAGI) is more than certain limits, also adjusted for inflation each year.

In 2017, that earnings threshold is $203,540 regardless of filing status. The tax-favored assistance ends totally once the adoptive parents' MAGI hits $243,540.

For 2018, the earnings threshold goes up to $207,140 and the credit/assistance is completely eliminated for taxpayers with MAGI of $247,140 or more.

Credit for qualifying kids: Of course, there also are rules regarding your new family member. To claim the adoption tax credit or use the workplace benefit, you must adopt or try to adopt an eligible child.

The Internal Revenue Service defines an eligible adopted child as a youngster age 17 or younger. Though not as common, the IRS says an eligible adoptee also can be an older person who is physically or mentally incapable of caring for him- or herself.

If you're looking to adopt a U.S. child, the IRS defines this youth as one who was a citizen or resident of the United States (including possessions) at the time the adoption process began.

There also are special rules for adoption of a U.S. child with special needs. In these adoptions, you may qualify for the full amount of the tax credit even if you paid few or no adoption-related expenses once the adoption is final.

A special needs child is one whom a U.S. state or county child welfare agency has determined is not likely to be adopted unless the government provides assistance to the adoptive family. Foreign children aren't considered to have special needs for purposes of the adoption credit.

Timing of claims: When you can claim your adoption expenses and how much is affected by whether you adopt U.S. child, a special needs youth or a youngster from another country.

For domestic adoptions, before the adoption is final you claim eligible expenses (more on these is coming up) in the year after you paid them. Once you're officially a new family, you claim expenses incurred that year on that year's tax return.

And if for some reason the adoption U.S. adoption doesn't go through (so sorry), you still can claim the costs you incurred in trying to add to your family.

The rules for a foreign adoption are slightly different. In these cases, any costs you paid cannot be taken until the year the adoption is final.

Whether you adopt a U.S. or foreign child, once your adoption is completed, any expenses you incur after that can be claimed in the year they are paid.

In the case of a special needs adoption, you may qualify for the full amount of the tax credit once the adoption is final even if you paid few or no adoption-related expenses.

Allowable adoption expenses: OK, you know when to claim your adoption expenses. Now just what costs can you count toward the adoption credit?

Qualified adoption expenses are what the IRS calls "reasonable and necessary" adoption fees. These include:

  • Adoption fees,
  • Court costs,
  • Attorney fees,
  • Travel expenses, including amounts spent for meals and lodging while away from home, and
  • Other expenses directly related to the legal adoption of an eligible child.

You cannot, however, count expenses for adopting your spouse's child or for a surrogate parenting arrangement.

More issues, more info: In keeping with the complexity of adopting a child, claiming the tax credit or income exclusion can get tricky.

You can find additional details on the adoption tax credit in Form 8839, which you file to claim the tax credit, and its instructions, as well as in Tax Topic 607 that discusses "Adoption Credit and Adoption Assistance Programs."

The IRS also has an online app that helps you determine if you're eligible to claim the adoption tax credit or exclude from your income any assistance you got in adopting.

State adoption assistance, too: Finally, don't forget possible state tax help.

Some states offer similar types of tax credits or deductions for adoptive parents. Check with your state's tax department, the North American Council on Adoptable Children (NACAC) or the Child Welfare Information Gateway.

You also might find these items of interest:




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