As the cost of adoption rises, most people turn to outside funding for help. You may be looking at either the federal tax credit or adoption benefits from your employer to help you fund your adoption. However, you must investigate these adoption benefits and tax problems they can create to make the best decision in your adoption journey.
Types
The federal adoption tax credit is subtracted from your overall tax liability for qualifying expenses paid to adopt an eligible child. These qualifying expenses can include agency fees, court costs, attorney fees, travelling expenses and more. In 2010, this credit is a maximum of $13,170 per child, and is refundable for the first time in the credit's history. For prior years, you can only claim credit up to your tax liability.
More and more employers are including adoption benefits in their overall benefits package. Such benefits typically reimburse the employee for adoption expenses up to a set amount once the child is home. The Dave Thomas Foundation for Adoption publishes an annual survey of the best adoption-friendly workplaces based on the maximum amount of financial reimbursement and paid leave for employees.
Benefits
When you are able to take advantage of these programs, you reduce your net out-of-pocket costs for adopting a child. In some instances, if your overall costs are low enough, you can almost negate your costs altogether. These programs can help make adoption affordable for many families for whom it would not be otherwise.
Misconceptions
Some people believe that these programs actually pay for an adoption. This is not the case; you still have to fund the adoption in total on your own. Afterwards, you are reimbursed for your expenses through these benefits. In addition, the tax credit requires that you have either a Social Security number or an Adoption Taxpayer Identification Number, or ATIN, for your child prior to filing your taxes. It can take quite some time to get either, which can delay your receipt of funds.
Considerations
The adoption tax credit serves as reimbursement for expenses you pay; so if you only spend $10,000, you can only claim $10,000 and not the full amount. In addition, you have to subtract the amount of employer benefits you receive from your overall expenses before claiming the credit. However, the one exception to this is in the case of a special needs child. If you adopt a child with qualifying special needs, you can claim the full amount regardless of your expenses. This is most often used for children that reside without the U.S. foster care system.
Problems
The most common problem with the adoption tax credit is its income cap. In 2010, the amount of credit for which you are eligible will start to dwindle once your modified adjusted gross income, or MAGI, reaches $182,520, and it is completely eliminated with a MAGI of $222,500. This amount is typically adjusted annually for inflation.
In addition, starting in 2010, you will have to file paper tax returns and include specified documentation to claim the credit. This will delay your tax refund if you are accustomed to filing electronically, and thus will lengthen your time between outgoing expenses and reimbursement.
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