adoption tax credit?

Question

My wife and I began the adoption process in 2005 which included a deposit with our tax agency to initiate their services. We have just received a baby but will not finalize the adoption until July or August of 2007. We have just paid the adoption fee to the agency and were unable to get any help from my employer for any adoption expenses. I assume we will have to wait until next year to claim the adoption credit. Will we be able to claim the deposit we paid to our agency in 2005 next year? Also, does the credit apply dollar for dollar or for the maximum amount allowed by the government?

The baby we adopted is a U.S. citizen. My main question with the tax credit is if I can still claim the agency deposit I made in 2005 on my taxes next year (2007) or do I need to claim the deposit this year (2006). For example, say that in 2005 I paid $2000 to the agency to begin the adoption process. I waited until Jan 2007 to receive a baby. The adoption will not be final until Sep 2007 but I was required to pay the remainder of my fee to the agency of $8000. I know that I will be able to claim the $8000 credit on my 2007 taxes since the adoption will not be finalized until Sep, but will I also be able to claim the $2000 deposit I made in 2005 on my 2007 taxes as well?

Answer 1

congrats on your soon to be! we just went through this for this year's taxes. it's my understanding the adoption credit can only be used in the year the adoption was finalized in, it does not matter from where, as long as you are a tax payin US citizen. lol don't read the irs publication, you'll just get a headache. you need to find an accounant who can understand the rules and regulations involved with this. H&R Block would not be my choice. you can include any expenses incurred up to that point of the finalization, no matter the year. the federal limit has been raised to 10,986.00 also check with your state, many states offer a credit as well. for example. our daughter was born in jan 06. we paid the 7500 agency fee in dec of 05. also we paid birthmother expenses of around 1500 in dec of 05 and the 1000 homestudy fee in dec of 05also. the remaining money we paid for attorney, additional birthmother expenses and travel were all in jan of 06. but all of these expenses were not allowed until the 06 taxes were filed. remember this is a credit, you will not get the entire 11k from federal the first year unless you have that much owed in taxes. we used around 3500 of the credit this year. this is a credit that carries over for 5 years. after 5 years you cannot use any remaining amount of the credit. make sure you set yourself up to use the entire credit if you can. also we live in kansas, and they also have an adoption credit of 50% of the federal if the adopted child was a kansas resident at the time of placement. 25% if a non-resident, and 75% if a kansas resident and special needs. as long as the adoption is finalized by the end of 2007, you can use any expense of agency fee's, attorney, homestudy, birthmother expenses (does not include medical) and travel for this credit. sounds like your agency fee alone will eat up the federal amount. hope this helps, and once again CONGRATS!

Answer 2

Read page 244 of IRS Publication 17 - you can download it at irs.gov. Also read the instructions for form 8839.

It looks like the timing depends on where you are adopting the child from - if the child is not a US citizen or resident at the time the adoptions process began, then you treat all the expenses as paid or incurred in the year it becomes final. If the child is from the US, then it looks like you'd take the expenses in the year you pay them.

Congratulations on your new baby.