By Jason Alderman
It’s hard to think of any act more generous than adopting a child. Many adoptive parents I know tell me it’s the most personally rewarding thing they’ve ever done.
But adoption isn’t cheap. Related expenses can quickly mount to tens of thousands of dollars. And sadly, sometimes adoptions do fall through, forcing prospective parents to endure the process – and expense – all over again.
Fortunately, the IRS provides significant tax incentives for people who adopt, including the adoption tax credit and an exclusion from taxable income for expenses paid through an employer’s adoption assistance program.
Several IRS rules, policies and dollar limits for adoption tax credits and exclusions have changed for 2012:
Depending on your income level, you may be able to claim a non-refundable tax credit for up to $12,650 for qualified expenses paid to adopt an eligible child. A few adoption credit rules and definitions:
Families who adopt special needs children are entitled to claim the full $12,650 credit, even if their out-of-pocket expenses were less than that amount. “Special needs children” are those the state determines cannot or should not be returned to their parent’s home and who probably won’t be adopted unless assistance is provided. This group may include older children, siblings, children with disabilities and those currently in foster care.
If the child is a U.S. citizen or resident alien, the following rules apply for both successful and failed adoptions:
If the child you adopt is a foreign national, you may only claim the tax credit or exclude employer-paid benefits after the adoption has become final. In addition, if the adoption is ultimately unsuccessful, you cannot collect the credit for those expenses.
In addition to the tax credit, you also may be able to exclude from your gross income for tax purposes any employer-paid amounts under a qualified adoption assistance program, whether paid to you or a third party. See Form IRS 8839 for details.
Adoption should not be entered lightly. A good place to start your research is the government’s Child Welfare Information Gateway at www.childwelfare.gov.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to www.practicalmoneyskills.com/summit2012.