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Archive of July 2014

July 21, 2014

Adoption Tax Credit and Exclusions

Adopting a child can have significant tax implications for you and your family. Check out the information below provided by the IRS.

Adoption Tax Credits and Exclusions

  • Qualified adoption expenses (QAE): defined in section 23(d)(1) of the Code, include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home) and other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
  • The 2013 credit has a maximum amount of $12,970 per child. If the adoption process carries over from one year to the next, the total amount of credits cannot exceed $12,970. The credit is determined by and attributed to each child not by tax year.
  • Credit and exclusions are subject to an income limitation and dollar limitation. Income limit on the adoption credit or exclusion is based on your modified adjusted gross income. For 2013, if income is below $194,580, not affected, if above $194,580 but less than $234,580 your maximum credit will be reduced. 
  • Dollar limitation of $12,970 applies separately to both the credit and the exclusion and you may be able to claim both for QAE paid during the adoption process. Any allowable exclusion must be claimed before any allowable credit is claimed. Any exclusion of expenses reduces the amount of QAE available for credit and you cannot claim both a credit and an exclusion for the same expense. The following are examples give from the IRS website:
    • You pay $12,970 of QAE. Your employer reimburses you for $2,970 of those expenses. You can exclude $2,970 from your gross income for that year. However, the expenses allowable for the adoption credit are limited to $10,000. You cannot claim both a credit and an exclusion for the same expense.
    • You pay $30,000 QAE. Your employer reimburses you for $12,970 of those expenses. You can exclude $12,970 from your gross income for that year. You can also claim a credit for $12,970. The remaining $4,060 of expenses cannot b used for either r the exclusion or adoption credit
    • In domestic adoptions, QAE paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment (and the credit is allowable even if the adoption is never finalized).
    • IRS Tax form for credit and exclusions is Form 8839, QAE. Complete form and attach to your Form 1040 or Form1040NR. No requirement to attach adoption documentation to your tax returns, however retain for your own records.

For more information regarding Adoption, contact the Pates Law Group.

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