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Hi everyone!
If the adoption takes place over 2 fiscal years -- so in our case over tax year 2004 and tax year 2005 -- do we take the tax credit in the year that the money is spent, or is the tax credit for adoption only good upon the adoption being complete (so in our case we would include it on our tax forms for 2005). And if the latter case is true, then can we still take a credit for expenses that were incurred in 2004 on a 2005 tax form?
Thanks,
Julie
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... the adoption must be finalized before the credit is taken.
If both parents (assuming a two-parent family) meet the child before the adoption is finalized overseas, then the child receives an IR-3 visa to come to the U.S. The child is considered, by both the USCIS and the IRS, to have had a full and final adoption overseas. Readoption in the state of residence is optional, unless a person's state requires it. U.S. citizenship takes effect as soon as the child enters the U.S. And the tax credit should be taken in the year that the adoption is considered final overseas and the child has entered the U.S.
If only one parent (assuming a two-parent family) meets the child, or neither parent meets the child before the adoption is finalized overseas, then the child receives an IR-4 visa to come to the U.S. The child is considered, by both the USCIS and the IRS, NOT to have had a full and final adoption overseas, even if the foreign government considers it final. Readoption in the state of residence is mandatory, unless the state has an alternate procedure for "recognizing" a foreign adoption. U.S. citizenship takes effect only after readoption/recognition has occurred. And the tax credit can be taken only after the readoption/recognition has occurred in the U.S., which may be in a different year from when either the overseas adoption or the travel home has occurred.
If a child travels to the U.S. under a decree of guardianship, for adoption in the U.S. -- the arrangement most commonly associated with Korea -- it doesn't matter if parents traveled or had the child escorted. The child receives an IR-4 visa, since he/she has not had an adoption overseas. The adoption is not considered full and final by either the USCIS or the IRS until after adoption in the child's state has occurred. U.S. citizenship does not take effect until the state adoption is final. And the tax credit cannot be taken until the state adoption is final. This may be at least a year or more after the child has arrived home.
All qualifying expenses associated with a particular international adoption can count for purposes of the tax credit, even if they were made in a prior year. The only exception is that expenses incurred prior to the increase of the tax credit from $5,000 to $10,000 are capped at the $5,000 level. (This really doesn't occur anymore, since the increase was several years ago.)
The situation with domestic adoption is somewhat different. Read the instructions for the adoption tax credit in your tax brochure or tax software, or consult a tax preparer experienced with adoption; unfortunately, many preparers do not have experience with domestic and international adoption.
Sharon
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