An Update on the Adoption Tax Credit for 2011

In previous blog posts, I wrote about the adoption tax credit, which provides qualifying taxpayers who have adopted children with relief from the expenses related to the adoption. While those expenses must be substantiated with documentation, if the child has received a determination from the state that he or she has special needs, then the full credit can be claimed without substantiation. Additionally, because of the substantiation requirements, taxpayers cannot use the Internal Revenue Service's per diem rate tables.

When I had previously written about the credit with regards to the adoption of children with special needs, the Internal Revenue Service had not provided any guidance with regard to substantiating a determination of special needs from the state. Since then, the IRS has issued some guidance on their website. According to the IRS, a state's determination of special needs may be substantiated with the following items:

  1. A signed adoption assistance or subsidy agreement issued by the state;
  2. Certification from the state or a county welfare agency verifying that the child is approved to receive adoption assistance; or
  3. Certification from the state or a county welfare agency verifying that the child has special needs.

Please note that this list is not exclusive.

For the 2011 tax year, taxpayers can claim up to $13,360 for each child they have adopted. The credit limit has gone up from $13,170 for the 2010 tax year and $12,150 for 2009. While the credit can be taken in multiple years, the credit limit is cumulative and includes any adoption tax credit claimed in prior years. That means for each adopted child, once the credit limit is reached, no future credit will be available unless the credit limit is raised. Further, since 2010, the credit is "refundable," meaning that qualifying taxpayers will receive the credit even if they do not owe any tax for that year.

The determination of which year a taxpayer can claim the adoption credit depends on when the adoption was or will be finalized and whether the adopted child is a U.S. citizen, resident alien or foreign national. If the child is a U.S. citizen or resident alien, then the adoption credit is taken in the following order:

  • For expenses paid before the adoption is final, the adoption credit is taken in the year after the expenses were paid;
  • For expenses paid in the same year that the adoption is final, the adoption credit is taken in the same year; and
  • For expenses paid in the year after the adoption is final, the adoption credit is taken in the year the expenses were paid.

For example, if you adopted a child in 2009, but you paid adoption expenses in 2008, 2009, and 2010, your 2008 expenses are taken on your 2009 tax return, your 2009 expenses are taken on your 2009 tax return and your 2010 expenses on your 2010 tax return.

If the child is a foreign national, then you take the adoption credit only in the year when the adoption becomes final. For expenses paid in the year after the adoption is finalized, the credit is taken in the year that you paid them.

Additionally, if you have failed to take the credit for any prior year you were eligible, you may file an amended return for that year to claim the credit. In any event, you should consider consulting with a tax professional if you plan on taking the credit.

For more information, please visit the Internal Revenue Service's website.

Matthew Grosh is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree from Villanova University and practices in a variety of areas including Taxation.

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