If you are adopting a child in 2011, be sure you are in the best position to take full advantage of the expanded adoption tax credit. A small investment in record-keeping now will reward you handsomely at tax time. In 2010, the Affordable Care Act increased the amount of the adoption tax credit to $13,170 and made it refundable, meaning you may claim the full amount of the credit as a refund even if you owe no tax.
The adoption tax credit is designed to offset qualified adoption expenses, making adoption a viable option for many families who would otherwise be unable to afford it. The credit is available to taxpayers who incurred qualified expenses when adopting or attempting to adopt a child. Taxpayers whose modified adjusted gross income exceeds $182,520 may not qualify for the entire amount, and the credit is phased out entirely for taxpayers with a modified adjusted gross income over $222,520.
Qualified adoption expenses include adoption fees, attorney fees, court costs and travel expenses. Other reasonable and necessary expenses may also qualify if they are directly related to the legal adoption of a child under the age of 18, or an adult physically or mentally incapable of caring for himself.
Even if your adoption is not finalized before the end of the year, you may still be able to claim the credit for the adoption-related expenses you have incurred. If you adopt a special needs child, you may qualify for a refund of the full amount of the credit, even if you did not incur adoption-related expenses.
If you are claiming the adoption tax credit, you will not be able to file your tax return electronically. Instead, you must mail a paper return, including a completed IRS Form 8839, Qualified Adoption Expenses. Along with your return, you must include documents supporting the adoption, such as a final adoption decree, the placement agreement from an authorized agency or court documents. If you are adopting a special needs child, you must also include the state’s determination of special needs in order to qualify for the full amount of the credit.
In 2012, the adoption tax credit reverts back to the pre-2010 amounts (adjusted for inflation), and will be a non-refundable credit, meaning it may only be used to reduce your tax liability. Any remaining credit amounts, in excess of your tax liability, must be carried forward and used within five years. There is currently no provision for any adoption tax credit beyond December 31, 2012.