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Salvage tax credit for adoption costs

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in Small Business Tax,Small Business Tax Deduction Strategies

The Tax Cuts and Jobs Act (TCJA) wipes out dependency exemptions for qualifying children for 2018 through 2025. But there are still tax breaks on the books for certain families.

Strategy: Take full advantage of the adoption tax credit. This tax break, which wasn’t touched by the TCJA even though Congress threatened to do so, enables you to offset your tax bill on a dollar-for-dollar basis, up to a generous limit.

Although the adoption credit is phased 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 a permanent part of the tax code.

For 2018, the maximum adoption credit equals the first $13,840 of qualified expenses incurred to adopt an eligible child. 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 $13,840 credit—even if your actual expenses are less.

The credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) above $207,140. No credit is available after MAGI reaches $247,140. Thus, there is a $30,000 phase-out range.

All reasonable 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.

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 (i.e., it can only offset actual federal tax liability).

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