Offsetting Legal Expenses With the Federal Adoption Tax Credit

About 2,000 adoptions are finalized in the state of Pennsylvania each year. The Federal Adoption Tax Credit often plays a significant role in such adoptions and was introduced to ensure that it was not only the wealthiest Americans who could afford to adopt. Representation from a PA adoption lawyer is often necessary and highly recommended, and the tax credit can offset those costs as well.

What Is the Federal Adoption Tax Credit?

Since being instituted in 1997, the Federal Adoption Tax Credit has been available to adopting parents across the U.S. There have been some changes each year, such as the amount available to claim and the income limits. In addition, the credit became refundable for 2010 and 2011 before reverting back to being nonrefundable for the following years. The credit covers expenses that occur before, during and after the adoption. Practically any expenditure directly tied to the adoption can be claimed. Some of the most common examples include:

• Court costs
• Legal expenses
• Adoption agency fees
• Traveling expenses, including food and lodging

There are some expenses that are explicitly excluded by the tax law, such as:

• Surrogacy costs
• Money spent for a step-parent
• Expenses covered by an employer

Who Is Eligible?

Anyone who has expenses related to an adoption is eligible. Whether the adoption was ever finalized has no bearing on eligibility. Note that there are some income restrictions. If your income is greater than the first threshold, the tax credit available to you is reduced. If your income is greater than the second threshold, you are not qualified to claim the credit.

When the Credit May Be Claimed

Adoption-related expenses can be claimed on your tax return for the year following the period in which they were incurred. However, in the year you complete an adoption, you have the option of claiming those expenses on the tax return for that year. In addition, any expenses related to an international adoption cannot be claimed until those proceedings have been finalized.

Adoption Tax Credit Refundability Act

The American Taxpayer Relief Act of 2012 extended the credit perpetually but did not allow for the refundable status. There have been multiple attempts to push through an Adoption Tax Credit Refundability Act. The most recent such act as of this writing had been drawn up and introduced but not expected to be passed. The credit being refundable would mean that adopting parents could claim it even if they did not owe taxes. In other words, it would add to their return.

Carrying the Credit Forward

Although this particular tax credit is not refundable at the time of this writing, you can carry it forward. File any claims at the appropriate time as you normally would. Any credit that goes unused due to a lack of tax liability will be available to offset future liabilities for up to five years.

Other Tax Credits Relevant to Adoption

The Federal Adoption Tax Credit is not the only tax credit that affects adoptive parents. The Child Tax Credit is available to all parents, claimable on a per-child basis and partially refundable. If an adoptive parent will have childcare expenses once the adoption is finalized, then he or she is eligible for the Child and Dependent Care Credit. There is also the Earned Income Credit, which is aimed at lower incomes—as in around $50,000 or less—and is refundable.

The Adoption Assistance You Need

If you’re considering adopting or have already started the process, then we highly recommend seeking local representation from a PA adoption lawyer. It is never too early to seek the necessary legal counsel. At Cofsky & Zeidman, we focus on adoption in NJ and PA, and we’d welcome the chance to assist you. Schedule your consultation by contacting us online or by calling our Philadelphia office at 215-563-2150, our Haddonfield office at 856-429-5005 or our Woodbury office at 856-845-2555.