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Defray adoption costs on your personal tax return

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in Small Business Tax

Is someone in your family planning to adopt a child? It can be costly and time-consuming—not to mention the emotional roller coaster.

Strategy: Recoup some expenses through the adoption tax credit. The credit reduces your tax bill on a dollar-for-dollar basis. Although it phases out for high-income taxpayers, many parents—especially younger ones—will benefit from at least a partial credit.

Here’s the whole story: For 2010, the maximum adoption credit is equal to $12,170 of the qualified expenses paid to adopt an eligible child (up just $20 from 2009). An “eligible child” is one under age 18 or physically or mentally incapable of caring for himself or herself. Other rules apply if a special-needs child is adopted. 
The credit phases out in 2010 for taxpayers with an AGI between $182,520 and $222,520. No credit is allowed if AGI exceeds $222,520. (IRS Revenue Procedure 2009-50)

All of the reasonable and legal costs directly related to the adoption are eligible for the credit. This includes:

  • 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.

On the other hand, you can’t claim the credit for any illegal fees, surrogate parenting fees or amounts reimbursed by a government entity or your employer.

The credit is generally available in the year that qualified expenses are paid or incurred. However, if the adoption isn’t final at the end of the year, the credit can’t be claimed until the following year. Once you reach the second year, the credit is available for previous expenses, even if the adoption is not finalized that year.

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

Tip: The adoption credit is currently scheduled to expire after 2010, but proposed legislation would extend it.

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