As the end of the year approaches, those families who have adopted a child in 2011 should be mindful of the need to have all of their documents ready for use in filing their tax returns to claim the Adoption Tax Credit.  Under present tax law, 2011 is the last year that the Adoption Tax Credit is a refundable one.   The Adoption Tax Credit will still be allowed for adoptions in in 2012, but in a slightly lower amount ($12,650 per child for 2012 vs. $13,360 in 2011) and it will not be a refundable tax credit in 2012.

Many adoptive parents have voiced concerns about recent audit practices of the IRS relating to families who have claimed the adoption tax credit in 2010.  Representatives of the American Academy of Adoption Attorneys met with and expressed these concerns to members of Congress.  The Congressional tax writing committees directed the U.S. Government Accountability Office (GAO) to examine the IRS’s practices for insuring compliance with the adoption tax credit and the report from that GAO examination was recently distributed and found that the IRS can substantially reduce the number of audits and the delays caused by the audits without reducing “robust enforcement” of the tax laws.

The full report can be found at www.gao.gov/new.items/d1298.pdf.  A summary of that report is copied below.

Summary

The federal adoption tax credit, established in 1996, was amended in 2010. These amendments included making the credit refundable (meaning taxpayers could receive payments in excess of their tax liability) and increasing the maximum allowable credit to $13,170 of qualified adoption expenses for tax year 2010. As of August 20, 2011, taxpayers filed just under 100,000 returns, claiming about $1.2 billion in adoption credits. Following these changes, the Internal Revenue Service (IRS) developed a strategy for processing adoption credit claims. GAO was asked to (1) describe IRS’s strategy for ensuring compliance with the adoption credit for the 2011 filing season, (2) assess IRS’s related communication with taxpayers and stakeholders, and (3) assess its processing and audit of claims. To conduct its analysis, GAO analyzed IRS data and documents, interviewed IRS officials, observed IRS examiners, and interviewed other stakeholders.

IRS’s strategy for ensuring taxpayer compliance with the adoption credit included the following: (1) Communicating and reaching out to taxpayers and other stakeholders, including tax professionals and adoption organizations, about new requirements. (2) Requiring taxpayers seeking the adoption credit to submit proof of a completed or in-progress adoption with their return. Because taxpayers claiming the credit for a special needs child (meaning that a state determined the child cannot or should not be returned to a parent, and using specified criteria, the state can reasonably assume that the child will not be adopted without state assistance) are allowed to claim the full credit without providing documentation of adoption expenses, they also needed to provide documentation certifying the special needs status of the child. (3) Requiring that returns and supporting documentation be filed on paper. (4) Automatically sending returns with missing or invalid documentation for correspondence audits (audits that IRS conducts by mail).

To inform taxpayers, paid preparers and other stakeholders about new adoption credit requirements, IRS used various tools including its website, Twitter accounts, and YouTube recordings. However, IRS did not make a specific effort to communicate or convey information about documentation requirements for special needs children to state adoption managers, who administer state adoption programs. Further, IRS did not specify in training materials for its audit examiners what documentation was required to prove special needs status. IRS later revised its training materials to say that a state adoption assistance agreement (an agreement between the state and adoptive parents) was sufficient proof but did not provide samples of such agreements in the materials or place any on its website. As a consequence, taxpayers submitted a majority of returns with either no documentation or insufficient documentation. As of August 2011, 68 percent of the nearly 100,000 returns on which taxpayers claimed the adoption credit were sent to correspondence audit. However, of the approximately 35,000 returns on which audits have been completed as of August, IRS only assessed additional tax about 17 percent of the time. The equivalent rate for all correspondence audits in 2010 was86 percent.

The time it has taken IRS to audit these predominantly legitimate adoption credit claims has reslted in considerable delays in the payment of the related refunds. For the 2012 filing season, IRS has options that might allow it to reduce the number of costly audits and issue refunds faster while still maintaining a robust enforcement strategy. One option is for IRS to immediately send a letter to taxpayers who submit returns without any documentation requesting it before initiating an audit. This could potentially reduce the number of audits and delayed refunds, but IRS has not yet determined the extent of this impact. IRS officials acknowledged that data from the 2011 filing season experience should allow them to determine whether sending an initial letter requesting documentation would be more effective than initiating a correspondence audit. GAO recommends that IRS communicate with state and local adoption officials, provide examiners with examples of adoption assistance agreements, place the agreements on its website, and determine whether sending a letter before initiating an audit would reduce the need for audits. IRS generally agreed with three of GAO’s recommendations, but had concerns that placing sample agreements on its website may enable fraud. However, since other proof of adoption must accompany a tax credit claim, GAO believes the benefits of making these agreements available to adoptive parents outweigh the risks.

Adoptive families who are entitled to claim the Adoption Tax Credit should review this information and insure that their attorney or agency have supplied them with the necessary documents to send in with their tax return and satisfy the IRS.  With many state courts having sealed adoption files, it is not always easy to get copies of needed court documents that will be required at tax time after the fact.  A little advance preparation will make the tax season an easier one for families, their tax preparers and for the IRS and will likley speed up the tax refund.

Mark

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

As I noted above, November is deemed National Adoption month each year by the President.  I think it’s worthwhile to read the Presdient’s offical proclamation and it is set out in full below.  Many children in state foster care are in need of families and services through no fault of their own.  There are many ways to help these children — consider getting involved in your community to help make a difference in a child’s life.

The White House  Office of the Press Secretary  For Immediate Release  November 01, 2010

                                 Presidential Proclamation–National Adoption Month

Giving a child a strong foundation — a home, a family to love, and a safe place to grow — is one of life’s greatest and most generous gifts.  Through adoption, both domestic and international, Americans from across our country have provided secure environments for children who need them, and these families have benefited from the  joy an adopted child can bring.  Thanks to their nurturing and care, more young people have been able to realize their potential and lead full, happy lives.  This year, we celebrate National Adoption Month to recognize adoption as a positive and powerful force in countless American lives, and to encourage the adoption of children from foster care.

Currently, thousands of children await adoption or are in foster care, looking forward to permanent homes.  These children can thrive, reach their full potential, and spread their wings when given the loving and firm foundation of family.  Adoptive families come in many forms, and choose to adopt for different reasons:  a desire to grow their family when conceiving a child is not possible, an expression of compassion for a child who would otherwise not have a permanent family, or simply because adoption has personally touched their lives.  For many Americans, adoption has brought boundless purpose and joy to their lives.  We must do all we can to break down barriers to ensure that all qualified caregivers have the ability to serve as adoptive families.

This year, on November 20, families, adoption advocates, policymakers, judges, and volunteers will celebrate the 11th annual National Adoption Day in communities large and small.  National

Adoption Day is a day of hope and happiness when courthouses finalize the adoptions of children out of foster care.  Last year, Health and Human Services Secretary Kathleen Sebelius was honored to preside over a ceremony celebrating two foster care adoptions as part of my

Administration’s support for this important day.  Adoptive families are shining examples of the care and concern that define our great Nation.  To support adoption in our communities, my Administration is working with States to support families eager to provide for children in need of a place to call home.  The landmark Affordable Care Act increases and improves the Adoption Tax Credit, enabling adoption to be more affordable and accessible.  As part of the Adoption

Incentives program, States can also receive awards for increasing adoptions and the number of children adopted from foster care.  AdoptUsKids, a project of the Department of Health and Human Services, offers technical support to States, territories, and tribes to recruit and retain foster and adoptive families; provides information and assistance to families considering adoption; and supports parents already on that journey.  I encourage all Americans to visit AdoptUsKids.org or ChildWelfare.gov/Adoption for information and resources on adoption, including adoption from foster care.

As we observe National Adoption Month, we honor the loving embrace of adoptive families and the affirming role of adoption in the lives of American families and our country.  Let us all commit to supporting our children in any way that we are able — whether opening our hearts and homes through adoption, becoming foster parents to provide quality temporary care to children in crisis, supporting foster and adoptive families in our communities and places of worship, mentoring young people in need of guidance, or donating time to helping children in need.  Working together, we can shape a future of hope and promise for all of our Nation’s children.

 NOW, THEREFORE, I, BARACK OBAMA, President of the United States of America, by virtue of the authority vested in me by the Constitution and the laws of the United States, do hereby proclaim November 2010 as National Adoption Month.  I call upon all Americans to observe this month by answering the call to find homes for every child in America in need of a permanent and caring family, as well as to support the families who care for them.

 IN WITNESS WHEREOF, I have hereunto set my hand this first day of November, in the year of our Lord two thousand ten, and of the Independence of the United States of America the two hundred and thirty-fifth.

                             BARACK OBAMA

November is traditionally declared to be National Adoption Month each year by the President of the United States, and National Adoption Day this year will be November 20th.  To commemorate this annual celebration of adoption, the courts make special arrangments in all states and set as many final adoption hearings as possible on the preceding day.  This year, Friday November 19th is the day set by the courts for this National Adoption Day event.   It is always wonderful to see so many happy faces and  families.  Court staff and judges throughout the country are again planning special ceremonies for the children and families to finalize as many adoptions as they can on this day.  

All adoptive families that are ready to finalize their adoptions are welcome to have their case heard on National Adoption Day.   I will be setting a number of adoption cases for final hearing that day in Snohomish County Superior Court in Everett, Washington.  I encourage everyone who is ready to finalize their adoption to have their attorney set their case for finalization as a part of this great event. Your family will have a great time and help to celebrate National Adoption Day.

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 local Community Colleges entitled “The Adoption Option”.  The goal of 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, or you can schedule a personal consulation at our office.  Please contact us to find out when the next class will be held, or to set up a time to meet with us.  

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.