The Stork Delivers Good Tax News for People Planning to Adopt
There’s welcome news for people who hope to adopt a child this year--or in the next several years. A provision in the 1996 minimum-wage law created lucrative tax breaks for adoptive parents, who often find themselves spending $10,000--or substantially more--to pay the legal, medical and social service expenses required when adding an adopted child to the family.
For many middle-income families, these tax breaks can mean the difference between actually adopting a child and wishing that they could.
“The upfront costs are so high that there are families who simply couldn’t afford to adopt a child,” says Patrick Purtill, director of government relations at the National Council for Adoption, a Washington, D.C.-based advocacy, education and adoption research group. “We are hoping [the tax breaks] will expand the universe of couples who can afford to adopt.”
The adoption tax credits--worth $5,000 to $6,000, depending on whether the child has disabilities or other special needs--bring adoptive families closer to economic parity with biological parents, who also bear costs from having children, but who often have a good portion of these costs offset by health insurance and tax benefits, Purtill says.
In fact, parents who adopt hard-to-place children out of the foster care system are likely to find that their costs are completely offset by the newly instituted tax benefits.
However, these tax breaks are complex. The form they take and their precise value depends to some degree on where you work, how much you earn and whom you adopt. You can even sometimes get tax credits for adoptions that don’t pan out.
Just how do these new rules work? Here’s a question-and-answer look.
*
Q: Precisely what are these adoption tax breaks?
A: They fall into two categories.
There is an “income exclusion” for people who work for companies that provide adoption assistance programs. These companies can pay up to $5,000 to or on behalf of an employee for “qualified adoption expenses” and the employee does not have to report the adoption assistance as income on their tax return. The bottom line: Someone in the 28% federal tax bracket who got $5,000 in employer-paid adoption assistance would pay $1,400 less in income tax because of this break.
The second break is a tax credit of up to $5,000 per child adopted. A tax credit is a dollar-for-dollar reduction in the tax that you pay. In this case, if you have $5,000 in qualified adoption expenses, you can reduce your income tax by $5,000 in the year following the one in which you incurred the expenses or in the year that the adoption becomes final, whichever comes first. If you owed less than $5,000 in tax in the applicable year, you can roll the remaining amount of the credit forward to reduce your tax for the next year. (In fact, these credits can be rolled forward for a total of five years.)
*
Q: Do you have to choose one or the other--the employer-paid assistance versus the adoption tax credit--or can you claim both?
A: You can’t get two tax breaks for the same expenses. But you can use both if you have enough qualified expenses to go around. In other words, if it costs $10,000 to adopt a child and your employer pays $5,000 of that cost, you can use the credit to offset the remaining $5,000. But if it costs only $4,000 to adopt, you would be able to claim only enough assistance and credits to offset those costs, not more.
*
Q: Who gets the $6,000 tax break you mentioned before?
A: Those who adopt children with special needs get an extra $1,000 in tax breaks, which also come in the form of tax credits or income exclusion. These children include kids who have physical, emotional and mental handicaps, as well as those who are considered hard to place by state adoption officials. Generally, a child can be classified as having special needs for reasons of age, race, sibling group or medical condition. However, the $6,000 credit can be applied only to domestic adoptions. Those who adopt foreign children, no matter how needy, get a maximum credit of $5,000.
And, in case you’re wondering, an employer that offers adoption assistance programs can provide up to $6,000 in help for workers who adopt special-needs kids within the United States too. In total, you could reap up to $12,000 in employer and tax assistance when adopting a special-needs child.
*
Q: What is a qualified adoption expense?
A: All reasonable and necessary expenses involved in legally adopting a child that is unrelated to you or your spouse. (There is no tax break for adopting a spouse’s child or to pay for a surrogate parenting arrangement.) These expenses can include legal fees, court costs, social worker and psychological counseling visits, medical expenses for the mother (when allowed) and even home renovation expenses that are required by the state to meet the needs of the child. (If you needed to add a ramp to accommodate a child in a wheelchair, for instance, the cost could be covered by the adoption tax credit.)
*
Q: What happens if you attempt to adopt a child, but the adoption falls through? Can you deduct expenses even when you didn’t complete an adoption?
A: In the case of a domestic adoption, these expenses are eligible for the credit in the year following the year that they are paid. Or, if you pursue another adoption, you can add these expenses into the cost of the new pursuit. If you do adopt the second child, any unreimbursed expenses from the failed adoption attempt would qualify for the credit in the year following when they were paid or when the successful adoption becomes final.
With foreign adoptions, the expenses qualify for tax breaks only when the adoption is successful.
*
Q: Are there any limitations on who can claim these credits?
A: Yes, the credits begin to phase out for taxpayers who earn more than $75,000 annually. (That exclusion applies to joint income for married couples, who are usually required to file jointly if they plan to claim this credit.) The credits are completely phased out for taxpayers with adjusted gross income of $115,000 or more.
In addition, there are no tax breaks for adoption expenses incurred before 1997. And the law has a December 2001 sunset date. Adoption expenses incurred after that point--unless the credits are extended--generally would not qualify for tax breaks.
Kathy M. Kristof welcomes your comments and suggestions. Write to her in care of Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail kathy.kristof@latimes.com
