IRS New Amendments for Qualified Adoption Expenses

The Internal Revenue Service recently released the 2014 version of Form 8839 (Qualified Adoption Expenses) along with its updated instructions.

An Adoption Credit is provided to the parents who adopt a child and is primarily to encourage child adoption by utilizing the adoption tax credit to offset adoption costs. While there are various costs and fees which are incurred in process of adoption, not all are considered as Qualified Adoption Expenses.

The qualified adoption expenses are the necessary fees to complete an adoption that is paid out of pocket and it includes: court costs, attorney fees, traveling expenses, meals and lodging while away from home, adoption home study, and other expenses associated with adopting a child.

Section 36C of the United States Internal Revenue Code offers a credit for “qualified adoption expenses” paid or incurred by individual taxpayers. According to the Internal Revenue Service (IRS), “Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and exclusion for employer-provided adoption assistance.

Changes brought forward by IRS for the year 2014 include:

  • The maximum adoption credit and exclusion amounts have been adjusted to reflect their 2014 values ($13,190 per eligible child).
  • The adoption credit carry-forward worksheet, which identifies unused credits that taxpayers may carry forward to 2015, has been modified to reflect that there are now three years (2012–2014) for which a taxpayer might have carry-forward amounts.

The income limit on the adoption credit or exclusion is based on one’s Modified Adjusted Gross Income (MAGI). If the MAGI amount for 2014 falls between $197,880 and $237,880, the credit or exclusion is subject to a phase-out (is reduced or eliminated). For tax year 2014, the MAGI phase-out begins at $197,880 and ends at $237,880. Thus, when the MAGI amount is below $197,880 for 2014, the credit or exclusion will not be affected by the MAGI phase-out and, if the MAGI amount for 2014 is above $237,880, the credit or exclusion will be zero. It should also be noted that the IRS consolidates a majority of the reporting for adoption-related expenses on Form 8839, Qualified Adoption Expenses. Therefore, it is important to include every qualified expense from the tax year in question on that form to be eligible for the adoption tax credit.

The credit will remain flat for special needs adoptions (those involving children who are deemed hard to place by a child welfare agency), allowing those families to claim the maximum credit regardless of expenses.

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