Expanded Adoption Tax Credit – New Rules

by Mark Demaray on February 23, 2011

Now Refundable.  As I posted some time ago, the adoption credit is now a “refundable” one, meaning that you may be able to claim it even if you owe no tax, for qualified adoption expenses that first became allowable in 2010 and for adoptions finalized in 2010.  Also, and Adoption Tax Credit balanced that were carried forward from tax years 2005 through 2009 also are now refundable in 2010.

The IRS Notice 2010–66, 2010–42 I.R.B. 437 explains this in more detail – a link to that Notice is here  www.irs.gov/irb/2010-42_irb/ar09.html.

Before this change, the adoption tax credit was non-refundable, meaning that it only could be used to reduce your tax liability, but credit amounts in excess of tax liability could only be carried forward for up to 5 subsequent tax years.   

The maximum credit amount and the exclusion for employer-provided benefits were each increased to the amount of $13,170 per eligible child for 2010. SA was the case before, that amount begins to phase for adoptive parents whose modified adjusted gross incomes exceeded $182,520 and is completely phased out for modified adjusted gross incomes of $222,520 or more.

New Documentation Required.  To claim the refundable adoption credit in 2010, qualifying adoptive families must complete and attach the new 2010 version of the IRS Form 8839 to their income tax return.  Additionally, one must include copies of some of the adoption-related documents. The documentation required varies and depends on whether the adoption was finalized in 2010 and whether the child is deemed a “special needs” child for tax purposes. The From 8839 instructions give examples of the specific requirements and documents needed for each child claimed.   Because of the new documentation requirements, one apparently cannot file an electronic tax return with Form 8839.

Please check with your accountant who should be informed about most of these changes but a quick search for “adoption tax credit” on the IRS website (www.irs.gov) will show you a wealth of good information and the forms that one needs to insure all of the new rules and requirements are being followed.   

Mark

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