Tuesday, November 21, 2006

Adoptions – Tax Credits and Income Exclusions

Adoptions are emotionally and financially draining. Often the process takes over a year where your entire life is scrutinized and evaluated. In addition, adoptions cost between $15,000 and $40,000. The joy of a having a new family member easily makes up for the emotional and financial aspects. In addition, there are significant tax benefits that can be used to offset the financial impact.

We learned about these tax breaks during the adoption of our daughter in 2005. Adoption assistance payment exclusions and tax credits covered about 50% of our adoption expenses.

In the 2005 federal tax returns, adoptive parents were allowed up to a $10,630 exclusion of employer adoption assistance payments AND up to a $10,630 tax credit against costs spent on adoption. Full exclusions and tax credits could be taken up to a modified adjusted gross income (MAGI) of $159,000 and phases out to zero at a $195,000. If the credit exceeded the tax owed, the balance could be carried forward to offset future taxes up to 2009. In addition, our state also offered an adoption tax credit.

In 2006, the exclusion and tax credit will increase to $10,960. Also, the MAGI range is increased cover $164,410 to $204,410.

If you are considering adopting a child, it is worth checking if you qualify for these tax benefits. See Tax Topic 607 - Adoption Credit and IRS Form 8839 for more details.

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC


Dimes said...

AND! You can carry those benefits forward for (i think?) five years, if your tax burden is low enough that you don't use up all the credit in just one year.

Super Saver said...


Thanks for the great points on the five year carryover option for unused adoption tax credits. I have revised the post to include the carryover information.

Anonymous said...

SuperSaver, where did you adopt your daughter from? My fiancee and I are thinking about adoption in the future.

Super Saver said...

Savvy Steward,

We adopted from China. When we adopted the wait time was 5-7 months. We have applied again to adopt from China. The wait is currently 16 months.

Good luck on your plans for adoption.