What are the general requirements and provisions that are required for the taxpayer to qualify for the adoption credit and exclusions?
For tax years beginning in 2010 and 2011, the credit for adoption expenses becomes a refundable personal credit, whereas it has always been nonrefundable in past years. It is available to qualified taxpayers for eligible expenses incurred in a qualified adoption (IRC Sec. 36C). The general provisions for the credit for adoption expenses include the following;
1. Benefit dollar limitations are based on the adoption of each child and are cumulative over all taxable years (not an annual limitation). This includes any amounts paid for qualified adoption expenses in connection with any unsuccessful attempts to adopt an eligible child before the successful final adoption of another child.
2. The adoption must be of an eligible child.
An eligible child is any child under the age of 18 at the time of the adoption; or physically or mentally incapable of caring for themselves.
3. An eligible special-needs child must meet two additional criteria:
The state has determined the child cannot or should not be returned to his/her parents, and because of certain circumstances such as ethnic background, age, physical, mental, or emotional handicaps, cannot be placed with adoptive parents without providing adoption assistance; and the child is a citizen or resident of the United States.
4. A taxpayer must incur qualified adoption expenses.These would include reasonable and necessary adoption fees, court costs, attorney and accountant fees, travel expenses (including meals and lodging), and other expenses directly related to the legal adoption of an eligible child; and costs of construction, renovations, alterations or purchases specifically required by the state to meet the needs of the child. To the extent that these expenses result in a credit, the basis of the property must be reduced.
5. Qualified adoption expenses should not include the following:
a. Expenses incurred in the violation of state or federal law.
b. Expenses incurred in a surrogate parenting arrangement (Notice 97-9) or in the adoption of a spouse’s child (IRC Sec. 36C).
c. Expenses reimbursed under an employer program or otherwise.
d. Expenses allowed as a credit or deduction under any other provision of the federal income tax law.
6. The timing of the deduction for domestic and foreign adoptions vary.
Domestic adoption expenses are deducted in the year after they are
incurred unless it is the year of finalization in which case the remaining expenses are taken in the year incurred, whereas foreign adoption expenses are all deducted in the year of finalization.