Expansion of Adoption Tax Credit for 2010

October 12, 2010

Since it was enacted on March 23, 2010, the Patient Protection and Affordable Care Act (the “Act”) has been quite the topic of conversation. While many of the Act’s tax provisions focus on providing various health care related tax incentives, it also raised the maximum amount of the adoption credit to $13,170 per child for 2010. The maximum for 2009, was $12,150. The Act also made the adoption credit refundable, which means that qualifying taxpayers will receive the credit even if they do not owe any tax for that year.

The adoption credit is generally available to cover various expenses incurred as a result of the legal adoption of a child under the age of eighteen. Qualified expenses include fees, court costs and attorney fees directly related to legally adopting the child. Traveling expenses, including meals and lodging while away from home in connection with the adoption, are also included in the credit. The credit is not available to taxpayers who are adopting a spouse’s child or to the extent that they are reimbursed under an employer or government program. For example, if a taxpayer incurs $11,000 in qualified expenses and $6,000 of those expenses are reimbursed to the taxpayer, only $5,000  of the expenses may be covered by the credit. However, certain expenses incurred by an employer for certain qualified adoption expenses may be excluded from the employee’s gross income under Section 137 of the Internal Revenue Code.

There is a phase out of the credit based on the taxpayer’s adjusted gross income. For example, in 2010, the phase out begins at $182,520 and increases as the adjusted gross income approaches $222,520, at which point the credit is no longer available.

One downside of the credit is that it is not possible to file your tax return electronically. This is because every expense claimed under the credit must be substantiated with adequate documentation.. In addition to the tax return, the taxpayer claiming the adoption credit must also file an IRS Form 8839.

For more information on the tax provisions of the Affordable Care Act, please see the IRS website.