Starting in 2010 the Adoption Credit became a fully refundable credit. This means that you are entitled to the entire amount of the credit no matter what your tax liability is. Before 2010 the Adoption Credit was a nonrefundable credit. This means the amount of the credit was limited to the amount of your tax liability if the credit amount exceeded your tax liability. However, the amount that exceeded your tax liability was eligible to be carried over to the subsequent 5 years of tax returns.
Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees and other expenses which are directly related to the legal adoption of an eligible child. An eligible child is an individual who has not attained the age of 18 as of the time of the adoption or who is physically or mentally incapable of caring for himself or herself. It also includes a child with special needs, any child who cannot or should not be returned to the home of his or her parents and a specific factor or condition makes it reasonable to conclude that the child cannot be placed with adoptive parents unless assistance is provided as determined by a state.
The maximum amount of the Adoption Credit for 2011 is $13,360. If the so called “Bush Tax Cuts” are not extended, this amount will revert back to its original $5,000 credit. If you are currently in the adoption process, it may be beneficial to prepay your adoption costs to take full advantage of this year’s Adoption Credit. Please contact a tax professional if you have any further questions about the Adoption Credit.