Financing an adoption is one of my least favorite topics. I get so frustrated when I meet amazing people who will be amazing parents that are kept from that role because a lack of financial resources. Thankfully, there are several resources available to help offset the cost of adoption. The one I will focus on today is the adoption tax credit. The tax code is a monster and something I never wanted to think about—so I married a tax attorney. (Full disclosure: that is not why I married him. It just happens to be one of the many perks!) If you have heard death and taxes are the only sure things in life, the adoption tax credit is not included. Here is what you need to know when applying for the credit.
Know Your Eligibility
To qualify for the adoption tax credit, you must adopt a child other than a stepchild who is under the age of 18 and cannot provide for themselves. There are also income limits. In 2015, couples who had an adjusted gross income of less than $201,010 can qualify for the full credit. Those who make more than $241,010 do not qualify. Fall in the middle? A partial tax credit may be available.
If you have a special needs adoption, you may qualify for the entire tax credit—even if you did not pay any qualified expenses. Keep in mind that a child with special needs is different than a “special needs adoption,” so be clear where your situation falls. (The IRS defines a special needs adoption as an adoption of children who are US citizens, have a special need, cannot or should not be returned their biological family, and are otherwise difficult to place.)
Some people may not realize they are eligible for the credit when an adoption doesn’t work out. Even if your domestic adoption is never finalized, you may still be eligible to receive the adoption credit.
Even if you don’t consider yourself an organized person, you will need to become one. Create a filing system, use one specific account for spending, and keep track of dates. This will be worth your time in the end. What are you tracking?
Qualified Expenses: These expenses include: reasonable and necessary expenses that directly related to the adoption of the child. This includes adoption fees, attorney fees, court costs, and travel (including meals and lodging away from home).
Adoption Assistance: If you received adoption assistance (from an employer, health insurance etc.), this assistance is considered an “advance” of the tax credit and will be deducted from the amount approved.
Keep a spreadsheet.
There are still people out there who would rather keep a big folder with all of your receipts than worry about a spreadsheet, but trust me on this. Having a spreadsheet will help to organize your spending, track your receipts, and make the credit process that much easier. Ready to take it a step further? Annie Swinton scanned and uploaded her receipts and linked it to her spreadsheet. It doesn’t get more organized than that!
Think you won’t get audited? In 2013, nearly 70% of adoptive families were at least partially audited. Make sure you have all of the needed documentation to support your credit. Odds are good you will need to provide that information to the IRS.
Hire a Professional
Tax laws change constantly. Even if you have used the adoption tax credit before, there will be changes the next time around. Tax professionals keep up-to-date on all the changes in the process, which will make your life easier. They will also be able to help with adoption expenses that are incurred during the time prior to finalization of the adoption.
Anything you have learned from your experience? Please share!