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By Sandra Block • USA Today • Updated September 8, 2008
Imagine spending the equivalent of a year's tuition at a private college before your child is a year old. That's the prospect facing many parents who apply to adopt a child from overseas. The cost of an international adoption can range from $15,000 to more than $30,000 - just for one child.
Years ago, Congress sought to ease this financial burden by enacting a generous tax credit for parents who adopt. This year, eligible parents can claim a tax credit of up to $11,650 per child to cover adoption expenses. A credit is more valuable than a deduction because it comes off the top of your tax bill.
But tougher restrictions on international adoptions could force prospective parents to wait longer to claim the adoption tax credit - and some might not be able to claim it at all.
People who adopt in the United States can claim a credit for adoption-related expenses in the year the adoption is completed or the year after they apply, even if it is still pending. But parents who adopt a non-U.S. child can claim the credit only in the year the adoption is completed, said John Warner, a tax attorney at Buchanan Ingersoll & Rooney in Washington. If the adoption is unsuccessful, he added, "You're out of luck in terms of the credit."
Nations limit adoptions
Several recent developments create new hurdles for parents who apply to adopt a child from overseas. Nations that once accounted for a large percentage of U.S. adoptions, such as South Korea and Russia, now limit foreign adoptions to encourage more domestic adoptions. Last year, China started barring adoption applicants who were obese, unmarried or over 50. And in response to State Department concerns about baby trafficking, Guatemala and Vietnam stopped taking adoption applications from Americans.
"Some adopting parents have been so discouraged by the length of time it takes, they've dropped out," said Keith Wallace, chief executive of Families Thru International Adoption, a nonprofit adoption agency.
"Those families aren't going to be able to claim the credit, and they're going to be out-of-pocket for the money" they've spent on the adoption.
Even those who persevere could lose the full credit. The existing credit is scheduled to expire in 2010. If not reauthorized by Congress, it will drop to $5,000, the amount of the credit before the current law was enacted, according to the American Institute of Certified Public Accountants. It now takes more than three years to complete the adoption of a child from China, Wallace said. Unless Congress reauthorizes the credit, families who apply to adopt a Chinese child this year may not complete the process in time to claim the full amount.
Tighter restrictions on foreign adoptions are leading more prospective parents to consider adopting in the U.S., but the number of domestic infants available for adoption is limited. Consequently, more parents are considering adoption of a foster child. Those parents are also eligible for the tax credit - and don't have to jump through as many hoops to claim it.
If the child is a special-needs child - a group that can include older children, siblings or children with disabilities - the parents can claim the full $11,650 credit, even if their out-of-pocket expenses are less than that amount, said Lillian Thogersen, chief executive officer of the World Association for Children and Parents, an adoption agency based in Renton, Wash.
"The credit was designed to encourage people to do those kinds of adoptions," said Emily Doskow, an attorney and co-author of "Do Your Own California Adoption."
Because the adoption is domestic, parents aren't required to wait until the adoption is completed to claim the credit. For example, Warner said, suppose you apply to adopt a special-needs child this year and the adoption isn't final by Dec. 31. You could claim the credit on your 2009 tax returns, even if the adoption isn't completed until 2010.
Other adoption tax credit provisions:
- High-income parents might not be eligible for the credit.
In 2008, parents with adjusted gross income of between $174,730 and $214,730 can claim a reduced credit, said Miguel Farra, partner at the accounting firm Morrison Brown Argiz & Farra in Miami. Parents with adjusted gross income of $214,730 or more can't claim the credit, he said.
- If your employer offers an adoption assistance program, the benefits aren't taxable. However, you can't claim the tax credit for adoption expenses reimbursed by your employer.