Affording Adoption
The Adoption Tax Expense Credit
Hope for Children Act
The Hope for Children Act was signed into law on June 7, 2001. This legislation provides a $10,960 tax credit for qualifying adoption expenses incurred in 2006. This amount is adjusted annually. Additionally, up to $10,960 paid or reimbursed by your employer for qualifying adoption expenses under an adoption assistance program may be excludable from your gross income, and the employer reimbursement amount is also adjusted annually. The Hope for Children Act applies to all adoptions—both domestic and international; however an international adoption must be finalized in order to claim the tax credit.
To get more information on the Hope for Children Act as it applies to your own tax situation please contact the IRS at 1.800.829.1040 or visit their web site: http://www.irs.ustreas.gov.
Questions and Answers
The adoption tax expense tax credit was modified and made permanent as part of the tax bill signed by President Bush on June 7, 2001. What will this mean for adoptive families?
The answers below are based on past IRS guidance and information provided in current IRS forms and publications.
In a nutshell what does the new law provide?
It provides a tax credit (an amount that can be deducted directly from taxes you owe) for expenses incurred when adopting an eligible child. All of the provisions of the new law are permanent; they will not expire, as the previous tax credit law did. The limitations on the amount of income parents may earn in order to use the credit were increased and are adjusted annually. Please refer to the current IRS guidelines to see how this affects you.
Details about the tax credit differ by the type of adoption.
For the adoption of U.S. children with special needs, the law provides a flat $10,960 credit regardless of the expenses incurred.
For the adoption of U.S. children without special needs, parents can take a tax credit of up to $10,960 for adoption expenses, even if the adoption is never finalized.
For the adoption of children from other countries, parents can take a tax credit of up to $10,960 for adoption expenses, but only if and when the adoption is finalized.
How does the IRS define a child with special needs?
The child must be a citizen or resident of the U.S. A state must have determined that the child cannot or should not be returned to his parents’ home, and that the child probably will not be adopted unless some assistance is provided to the adoptive parents. A child who is adopted internationally can never qualify as a child with special needs in this context.
In international adoption, does the IRS consider the overseas adoption or the U.S. readoption to be the final one?
It remains to be seen. But it is suspected that the IRS will rule that, if there is a finalization in the child’s country of origin, that date will be used for purposes of the new tax credit. In the case of an adoption that requires finalization to take place in the U.S., then the U.S. date would be used. Please refer to the instructions for IRS Form 8839.
For more information, or for tax forms, please visit http://www.irs.gov/taxtopics/tc607.html.
