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Embrace tax break for adoption expenses

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in Small Business Tax,Small Business Tax Deduction Strategies

Congress has yet to approve a number of “extenders” for 2014, but one tax break for soon-to-be parents is already locked up for good.

Strategy: When allowed, cash in on the adoption tax credit. Thanks to recent tax legislation, the credit—a dollar-for-dollar reduction of your tax bill—is now permanent.

Although the adoption credit phases out for high-income taxpayers, many parents can still claim at least a partial tax benefit.

Here’s the whole story: For 2014, the maximum adoption credit equals $13,190 of the qualified expenses incurred to adopt an eligible child (up from $12,970 in 2013). An “eligible child” is one who is under age 18 or physically or mentally incapable of caring for himself or herself. If you adopt a special needs child, you can claim the maximum credit even if your expenses are less.

The credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) above $197,880. No credit is available after MAGI reaches $237,880.

All reasonable and legal costs directly related to the adoption are covered by the credit, including:

  • Adoption agency fees
  • Court costs
  • Attorneys’ fees
  • Travel costs while away from home (including meals and lodging)
  • Re-adoption expenses to adopt a foreign child.

Conversely, expenses that are not eligible for the credit are illegal fees, surrogate parenting fees or amounts reimbursed by a government entity or your employer.

Caution: The credit can’t be claimed for a foreign child until the year in which adoption is final.

Tip: The credit is nonrefundable, so it only helps you if you have a federal income tax liability.

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