A Dad's Journey Through International Adoption: Adoption and Taxes Part III

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Adoption and Taxes Part III

Sunday, October 29, 2006

So in this part of the tax implications of international adoption I'm going to delve deeper into the Adoption Tax Credit I gave an overview of last time. Here in part III we'll look at the in's and out's of getting the credit and what limitations there are. So let's get going.

In order to use this credit you will need to file form 8839 in the tax year that your adoption becomes final. The form and instructions can be downloaded from the IRS here. You will need to figure out how much qualified adoption expenses you had. The actual text of the tax code that explains this is as follows:

The term "qualified adoption expenses" means reasonable and necessary adoption fees, court costs, attorney fees, and other expenses which are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer, which are not incurred in violation of State or Federal law or in carrying out any surrogate parenting arrangement, which are not expenses in connection with the adoption by an individual of a child who is the child of such individual's spouse, and which are not reimbursed under an employer program or otherwise.

Okay, what does that mean. Basically any of your expenses paid to your home-study agency and/or placement agency and your travel costs including meals and lodging. But note that it says, "...not reimbursed under an employer program..." so subtract amounts that your employer adoption program (if you have one) covers. However in most cases, you will have well over the $10,000ish limit even with reimbursed amounts.

Important Point #1: This is just my "plain english" explanation, always follow the instructions for form 8839.

Limitations

If you were thinking, "Damn I knew there was going to be a catch" you're right there is.

First is your total income or actually your Modified Adjusted Gross Income (MAGI). If MAGI, which is basically line 38 but as always follow the instructions for form 8839 since there's a bit of an adjustment to line 38 in some cases, is above $164,410 (I'm using tax year 2006 info) your credit will be reduced from the maximum. If your MAGI is above $204,410 (again this is for tax year 2006) you cannot take the credit at all. I know it's a bummer but there are a few loopholes here. If your company has a deferred compensation program you may want to look into that. Remember rich people (Congressmen/women) wrote the tax code so there are plenty of loopholes and smart people use them (I do all the time).

Sorry but this is the way the game is played. I didn't vote these folks in. In fact, mostly middle class and the poor did so they must be happy with the rich getting richer at their expense. Again, this is the way the game is played and therefore we must play it based on the rules as they are presented to us.

But as usual, I digress. The second limitation is that you cannot get back more than you owe. So your tax liability can only be reduced down to $0. It can't go into negatives. However, if your tax liability is reduced to $0 and you still have not used up your credit allowed, you can "carryforward" any unused credit for up to a maximum of five years. So even if you have a low tax liability each year you most likely won't lose out on this great tax benefit.

Important Point #2: Remember tax liability is what your real total income tax was. Don't confuse it with what the amount you have to either pay or get a refund on when you do your tax return. Tax liability is the amount on line 63 of your tax return (I'm talking about form 1040).

Anyway, that's the basics of the Adoption Tax Credit. As I said you should read and follow the instructions for form 8839. If you want to email me with a question (keep in mind I'm not a CPA or CFP--Certified Financial Planner) but I do pride myself on my knowledge of the tax and financial aspects that affect my own situation, please feel free to contact me. My email is listed in my profile (the link is under the picture of Stef and myself).

The final part of this series on taxes will be just a very brief discussion on
the other tax credits and deductions you may be able to use when going through international adoption.

posted by Steveg @ 9:30 AM

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I'm Steve and this is my wife Stefanie. This is our story, mostly seen through my eyes, of the journey to create our family by adopting a child from Russia.

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