The new Health Care Bill recently signed into law by President Obama includes some important changes to federal law relating to the Adoption Tax Credit.  The former law that allowed for the Adoption Credit was enacted some 10 years ago and had what is known as a “sunset clause” — which meant that the law that allowed a federal tax credit for adoption expenses was to expire and cease to be the law as of December 31, 2010.   This law was amended in the new Health Care Bill such that the Adoption Tax Credit is extended for another year – through December 31, 2011 — and the maximum amount of allowable tax credit was raised from $12,170 to $13,170.  Also, any qualifying adoption occurring after January 1, 2010 is now eligible for that higher tax credit amount.   Also of great importance is a change that makes the tax credit now a “refundable” one — which means that even in adoptions where families owe zero taxes on their tax return, they can now receive the applicable tax credit amount in the form of an actual refund from the IRS to reimburse them for adoption-related expenses.  

Refundable tax credits are not common in our tax law because they basically provide a direct government subsidy that benefits taxpayers relatively quickly after they have incurred expenses for activities that the Congress wants to encourage — thus, a refundable tax credit is expensive for the government.  The Adoption Tax Credit that we have seen in the last 10 years has been a “non-refundable” tax credit – a factor that met with some criticism because it commonly allowed for more benefit to higher income taxpayers who had tax liabilities to offset with such a credit. The new change makes the tax benefits of the Adoption Tax Credit much more available to lower income families.

 The following scenario illustrates the changes to the Adoption Tax Credit law and how it will work:

 A family adopts a child and that family had an income prior to any tax credit such that they owe a total tax of $7,500.  They then calculated the costs incurred in their adoption and their total of allowed adoption expenses came to $10,000.   In this situation, the Adoption Tax Credit would not only zero out their tax liability of $7,500, but the IRS would also send this family a tax “refund” check for the left over $2,500 of the tax credit.

 Under the former law which established the Adoption Tax Credit as a non-refundable credit, this family’s tax liability would have been taken to zero, and the unused tax credit of $2,500 would not have been refunded, but would have been carried over to the next tax year to be applied to their tax liability in that year.     

 This is a very positive new tax law change for adoptive families.  Please do not hesitate to call my office or check with your accountant if you have any additional questions.

Mark Demaray periodically teaches a class at Shoreline Community College entitled “The Adoption Option”.  This class helps attendees understand the different types of adoption available and provides an overview of services in Washington state, as well as nationally and internationally, to help one decide if adoption is right for them and their families and if so, what type of adoption is best suited for them.   Included will be discussions of the risks and benefits of adopting internationally versus domestically, private versus agency adoption of infants, and of adopting children from the state public agency foster care system.   The different types of adoption processes, such as private agency and independent adoption, are reviewed as well as information on how to choose an adoption agency, an adoption attorney, and how to talk with family and friends about the decision to adopt.

This class is offered periodically and is next scheduled for April 12, 2010 from 6:00 p.m. to 8:30 p.m.  Please contact our office or visit Shoreline Community College’s Center for Business & Continuing Education at:  www.shoreline.edu/ce  where this class is listed as Class #7023.  

The 2010 Washington State Legislature is now in Session and one of the Bills proposed would change Washington law to allow a surrogacy arrangement in which compensation could be paid to a surrogate — a practice which is not allowed and a crime under present state law.   The Bill is House Bill 2793.   If you have an interest in this subject and are supportive of the Bill, please contact your state Senator and Representative and make your views known.  You can find this Bill and others on the Washington State Legislature’s web site:   

http://apps.leg.wa.gov/billinfo/

Please feel free to contact my office for information on this proposed new law or on other legal questions in the Assisted Reproduction field.

This past week, the Adoption Tax Relief Guarantee Act, Senate Bill 2816, was introduced in the U.S. Senate by Senators Jim Bunning (R-Kentucky) and Ben Nelson (D-Nebraska). The aim of this Bill is to repeal the “sunset” or ending of the Adoption Tax Credit and Adoption Assistance Programs that were part of the Economic Growth and Tax Relief Reconciliation Act of 2001.  The Bill was introduced with the strong support of the American Academy of Adoption Attorneys, the National Council for Adoption and RESOLVE, the national infertility support association.   If enacted as introduced it would make the Adoption Tax Credit and the employer Adoption Assistance Program a permanent part of the tax laws and would make the tax credit more taxpayer friendly by allowing all eligible adoption expenses for domestic adoptions to be claimed in the year they are paid or incurred, rather than in later years as is often the case under present law.  If this Bill extending adoption related tax benefits is not passed, adoption related expenses paid or incurred would not be given any favorable tax treatment as was the case some 10 years ago.  Please contact your Senators and Representatives in Washington, D.C. and encourage them to give all of their support this Bill that would extend the very favorable laws that have helped so many families be able to adopt and provide loving homes for many thousands of children.   Now is a time to keep moving forward in our committment to help children find loving homes rather than to go backward.

November is traditionally declared to be National Adoption Month each year by the President, and National Adoption Day is November 21.  To commemorate this annual celebration of adoption, the courts in all states try to have as many final adoption hearings as can be heard on Friday November 20th.  This year, the adoptions of 175 children were finalized in the courts of Washington state — and 28 of those were in Snohomish County Superior Court where I was honored to help with the adoptions of 9 children.  It was a busy but wonderful day to see so many happy faces and  families.  The court staff and and judges went out of their way to accomodate the families and to make the day a special one. Many thanks to all  the social workers and court staff for making the day a special one.

As we near the end of the year, all families that have adopted a child in 2009 should be aware of the very favorable tax law provision commonly called the “Adoption Tax Credit” that may be available to them.   This tax laws allow an adoptive family a tax related benefit that in most cases results in a refund of all qualifying costs and fees spent on an adoption.  The IRS allows a fairly broad definition of “allowed” costs and fees such that in most cases, any and all fees and costs paid to an adoption agency, an attorney helping with an adopt ion, costs paid to or for the benefit of a birth parent and medical costs and related services, are most often allowed.  As such, those costs and fees are included in the calculation of the Adoption Tax Credit amount.  A tax credit is deducted from the bottom line tax that is owed, so for most families, that reduction in tax means getting some or all of their adoption costs and expenses returned to them in the form of an IRS refund on a dollar-for-dollar basis of the amount allowed.   The dollar amount allowed under the law changes each year and it is currently set at $12,150 per child for 2009.  This Adoption Tax Credit begins to phase out for those families whose modified adjusted gross income is in excess of $182,180 — and the credit is completely phased out for families with modified adjusted gross incomes of $222,180 or more for 2009.  In an adoption of a “special needs” child – usually a child adopted from state foster care – a family can qualify for the full tax credit amount — $12,150 — for each child without having to have paid any costs or expenses.  This tax credit is most commonly taken in the year the adoption is finalized, and if it can’t be used up in one tax year, any unused amount can be carried forward to future tax years.  The present tax law that allows this Adoption Tax Credit is set to expire at the end of 2010 unless Congress extends it.  

The important point for families who have adopted or who are adopting a child in 2009, is to do everything possible to try and have your adoption finalized by the end of 2009 so the Adoption Tax Credit can be taken when the 2009 tax returns are filed in early 2010.   

 Check with your accountant or call our office for more details regarding the specific application of this adoption tax benefit in your case.