People adopt children under a variety of circumstances, but they all share the common attribute of incurring considerable expense. Fortunately, tax benefits are available to help defray these costs. Because of the complexity in determining how and when adoption expenses deliver tax advantages, these cases are common jobs for Enrolled Agents to address.
Taxpayers receive a tax credit for amounts paid to adopt a child. In addition, any assistance from an employer in covering these costs is tax-free income. Beyond these basic facts, the tax details surrounding adoption expenses have changed over the years. The tax credit had been refundable for 2010 and 2011. It reverted to a nonrefundable credit for 2012 tax returns. Keeping abreast of this change has been a component of EA CE courses for Enrolled Agents. Current tax returns can only utilize the adoption tax credit to cover tax liability. This commonly increases the amount of withholding refunded to affected taxpayers, but no part of the tax credit is given as a refund. However, taxpayers can carry forward an unused portion the credit to future years.
Another feature of Enrolled Agent education on this subject is the dollar limitation. A maximum annual amount is available for the combined tax credit and income exclusion of employer assistance. This figure is indexed to yearly adjustment for inflation. It was set at $12,970 for the 2013 tax year. Moreover, this ceiling is reduced in a given year by any portion used in prior years for the same adoption effort. Significantly, the amount is a limit per child.
According to the 2012 guide published by the magazine Adoptive Families, most domestic newborn adoptions cost between $20,000 and $40,000. International adoptions typically cost more than $25,000. Considering that around $30,000 is the average adoption cost, the importance of capturing tax benefits is an obviously crucial process during an Enrolled Agent career. Expenses that are allowed in calculating the credit amount include adoption fees, attorney fees, other direct costs of the process, and travel expenses – except those paid by government programs or an employer.
Every domestic adoption and attempted adoption qualifies for the tax credit. This includes all children who are US citizens or residents at the time the adoption attempt begins. International adoptions must become final for taxpayers to obtain the tax credit. Consequently, taxpayers may utilize the credit in the year expenses are paid for domestic adoptions. Conversely, the expenses for a foreign adoption are accrued for claiming the credit only in the year when the adoption is finalized.
IRS rules stipulate that adopted children trigger the tax credit only when they are either under age 18 or any age if they are disabled and incapable of self-care. When government assistance reduces the cost of adoption for a special needs child, the maximum amount of tax credit is available for finalized adoptions even if the taxpayer’s actual costs are lower.
Taxpayers qualifying for the credit have incomes beneath a threshold that’s indexed to the inflation rate. Like other elements of an Enrolled Agent course, income is defined by a formula that adds certain items to AGI and derives a modified adjusted gross income. The adoption credit is available to a taxpayer with MAGI of less than $194,580 in 2013. After that level, the credit is phased out and eventually reaches zero when MAGI exceeds $234,580. This limit applies regardless of filing status. Individuals who are married filing separately are ineligible for the adoption tax credit. Enrolled Agent services for people with adoption expenses clearly help sort out all the issues concerning qualifications, timing, and paperwork for the applicable tax credit.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.