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Embrace tax break for adoption expenses

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in Small Business Tax,Small Business Tax Deduction Strategies

Perhaps someone in your family is contemplating the adoption of a child. It’s an expensive undertaking, but the adopting parents may qualify for some tax relief.

Strategy: The adoption tax credit allows you to offset your tax bill on a dollar-for-dollar basis up to a generous limit.

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

Here’s the whole story: In the past, the adoption credit was extended several times, with certain modifications in the rules. However, starting in 2013, the credit became permanent.

For 2016, the adoption credit equals 100% of qualified expenses to adopt an eligible child up to a maximum credit of $13,460. An “eligible child” is one who is under age 18 or physically or mentally incapable of self-care. If you adopt a special needs child, you can claim the maximum $13,460 credit in any event.

For 2016, the credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) above $201,920. No credit is available after MAGI reaches $241,920.

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.

The credit is generally available in the year that qualified expenses are paid or incurred. However, if the adoption isn’t finalized by 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 isn’t finalized that year.

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

Tip: The credit is nonrefundable, which means it can only be collected to the extent you have a federal income tax liability for the year.

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