Assuming you and your spouse are gifted with the love, nurturing nature, affection and resources, adoption is a great way to grow a family while providing stability to a child in need. At last the federal government’s tax policy has recognized the win-win for parent and child as well as its benefit to society in general. Instead of staffing up county social service agencies and foster homes around the country with federal dollars, the Bush Administration has redirected federal resources. In doing so, our federal government has empowered some families to answer “yes” to one question raised by adoptive couples contemplating adoption: “But honey, do you think we have the resources?”
Now the answer increasingly is “Yes!” as a result of tax reform. Now the relief for many who adopt is that they may qualify for tax relief if they adopt a child. Not only do you receive the traditional benefits of a dependant exemption, earned income tax credit, child tax credit and qualify for head of household status, but now adoptive parents may also receive an adoption credit (not merely a deduction) for their adoption expenses.
A tax credit reduces your taxes dollar for dollar. If that were not enough, should your employer sponser an adoption assistance program, they can pay some of your adoption expenses and you may be able to exempt some of those employer paid benefits from income thereby reducing income taxes. The best part is that parents may be able to take both of these:
To claim both a credit and an exemption for your adoption related expenses you must have incurred at least $20,000 in adoption related expenses. You may not claim both a credit and an exemption for the same expense.
Increases and Changes for 2003
Many of these beneficial changes stem from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) which was targeted specifically toward families with children. The enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) accelerates some of the provisions provided by EGTRRA. While JGTRRA will expire in the next two to five years, EGTRRA is scheduled to "sunset" December 31, 2010.
EGTRRA both increased and expanded existing tax breaks aimed at assisting parents: the child tax credit; the adoption credit and exclusion; and the dependent care tax credit. It also established a new business tax credit related to employer-provided childcare. Below are highlights of the major implication for adoption.
EGTRRA repeals the alternative minimum tax (AMT) offset of refundable credits, and permanently allows the child tax credit to be claimed against the AMT.
EGTRRA permanently increases the adoption credit to $10,000 per eligible child and permanently allows the credit against the AMT. In addition, up to $10,000 in employer-provided adoption assistance per eligible child may now be excluded from income. The income phase-out range for both the credit and exclusion is doubled to $150,000 of modified AGI. All provisions became effective in 2002, unless otherwise noted. The credit and the exclusion of income are incrementally reduced when the parents joint modified adjusted gross income is between $150,000 and $190,000. Above that bracket the adoption credit and exclusion are completely phased out.
In the case of a special needs adoption, effective in 2003, the $10,000 credit for a special needs adoption will be available in the year that the adoption is finalized, even if you do not have any qualified adoption expenses.
This truly represents an example of wise tax policy. Governments have traditionally been quick to tax the sin and slow to credit the saints. Better late than never!!
(Additional questions on adoption issues or taxation can be directed to gtroy@troy-law.com)
© Troy & Associates, P.A. 2004
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