By Debra Nance
The adoption of a child is a wonderful experience but, as you may expect, there are many expenses and costs involved in the process. In 1996, we told you about the Small Business Job Protection Act (“SBJPA”). This Act was developed to promote adoptions in the United States by offering a federal tax credit (a dollar-for-dollar reduction to your tax bill) to defray the cost of customary adoption expenses. In fact, this program was so successful that on June 7, 2001, the President signed a tax bill that modified and increased the tax credit for all qualified adoptions.
An increase in the tax credit!
The 1997 program originally allowed for a $5,000 tax credit, and up to $6,000 for a special needs child. Furthermore, in 1997 the full $5,000 or $6,000 tax credit was available only to those with adjusted gross incomes up to $75,000. At the $75,000 income level the tax credit began to phase out and was completely unavailable to incomes over $115,000.
Now, under the new law that went into effect on January 1, 2002, a full $10,000 tax credit was available for certain adoptions up to adjusted gross incomes of $150,000. The phase-out began at $150,000 and ran through adjusted gross incomes of $190,000. For the tax year 2003, the maximum credit was adjusted to $10,160 and the phase-out now begins when adjusted gross income exceeds $152,390. For tax year 2004 the maximum credit will adjust to $10,390 and the phase-out will begin when adjusted gross income exceeds $155,860. Therefore, more income groups are able to enjoy the benefits of this tax credit.
Great, but is it permanent?
The current tax credit provision for qualified adoptions is scheduled to expire at the end of 2010. On March 4, 2003 Congress introduced H.R. 1057, known as the Adoption Tax Relief Guarantee Act, the purpose of which is to make the adoption tax credit permanent. H.R. 1057 is currently before the House Ways and Means Committee.
FAQs
In the meantime, the following questions and answers have been developed to provide general information and education regarding the new tax changes. Of course, for specific tax questions please contact a tax professional.
Q: What is the new tax credit?
A: A dollar-for-dollar reduction of your tax bill up to $10,160 (for the 2003 tax year) for qualified expenses in qualified adoptions.
Q: How is an “eligible” child defined?
A: An eligible child is a minor under the age of 18, or a person who is physically or mentally incapable of caring for himself or herself regardless of age. However, an eligible child “cannot” be the child of either taxpayer. Hence, the credit cannot be claimed in the adoption of a stepchild.
Q: How is a “special needs” child defined?
A: A child under the age of 18, that is a citizen or resident of the United States and the state has determined that the child cannot, or should not return to his or her parents’ home and probably will not be adopted unless adoption assistance is provided to adoptive parents.
Q: What is a qualifying adoption?
A:
- the successful adoption of a U.S. citizen that becomes final;
- the expenses incurred in an unsuccessful adoption of a U.S. citizen that does not become final;
- the successful adoption of a special needs child that becomes final;
- the expenses incurred in an unsuccessful adoption of a special needs child that does not become a final;
- the successful adoption of a foreign born child that becomes final.
[Note: Expenses in an unsuccessful attempt to adopt a foreign born child, where the adoption does not become final, will not qualify for the credit.]
Q: What are qualifying expenses?
A: Reasonable and necessary adoption agency fees, court costs, attorney fees, birthmother assistance, and the traveling expenses of the adopting parent(s) while away from home, including meals and lodging, etc.
Q: What form should be filed to claim the credit for qualifying expenses in a qualifying adoption?
A: File form 8839 with either your 1040 or 1040A form to take the credit.
Q: How does this differ from my employer’s Adoption Assistance Program?
A: Under a different law, the Adoption Assistance Program allows taxpayers that receive assistance from their employers for qualifying adoption expenses to “exclude” the amount from their taxable income.
For those of you thinking of adopting please contact Debra Nance regarding Michigan direct placement adoptions, interstate adoptions, family/relative adoptions or stepparent adoptions. Our mission is to help you accomplish your goals in business and in life.
If you think some form of adoption may be right for you, or for more detail regarding the adoption process, please contact Ms. Nance at 248.740.5686 or click here to send an email.
Be advised that the information provided herein relative to the adoption tax credit has been provided for educational purposes only. For specific tax questions seek the advice of a tax attorney or other tax professional.
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