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Health care reform includes tax credit for adoption

adoptionThere are 130,000 children in the foster care system waiting to be adopted in the US. Their prospects may have just gotten a little brighter. The recent health care reform bill has extended the previously boosted adoption credit which was slated to "sunset" at the end of 2010. Without the extension, the credit would have reverted back to the 2001 limits of $5,000.

Generally, you can take a tax credit on your federal income tax return for qualifying expenses paid to adopt an eligible child. Tax credits are desirable because they are a dollar for dollar reduction in your tax liability.

An eligible child must be under age 18 or physically or mentally incapable of caring for himself or herself. Qualifying expenses related to an adoption include reasonable and necessary adoption fees, court costs, attorney fees and travel expenses. You may also be able to include other expenses directly related to the adoption.

There are some limitations to the rule. Most notably, the adoption credit (and/or exclusion from gross income in some cases) is limited to the dollar limit for that year for each effort to adopt an eligible child. In the case of an attempted adoption of a non-US child, the credit cannot be taken unless and until the adoption becomes final. For the adoption of U.S. children, expenses can be claimed even if the adoption is never completed.

The income limit on the adoption credit or income exclusion is based on a taxpayer's modified adjusted gross income (MAGI). If your MAGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. But if it's over the phase out limit, your available credit will be reduced or eliminated. Currently, the credit begins to phase out if your MAGI exceeds $182,180; if you make more than $222,180, you cannot claim the credit at all. The amount of the MAGI is not affected by your filing status; the same rules apply for single parents as married parents.

Under the current rules, if you are married, your filing status must be married filing jointly in order to claim the adoption credit or exclusion. However, if you meet special requirements, you may opt for married filing separately as your status.

Assuming that you otherwise qualify for the credit, it has not only been extended through 2011, it's also refundable, which means taxpayers can get money back even if they do not owe. The dollar limitation for the credit has also been increased by $1,000 to $13,170 for adoptions occurring after Jan. 1, 2010 (the bill is retroactive).

To take the credit, you'll need to file a federal form 8839 together with your federal form 1040. The rules for claiming the adoption credit can be tricky, so be sure and consult with your tax professional if you have questions. Keep in mind that most credible adoption agencies and organizations are familiar with the rules (and exceptions) and may also be able to help.

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