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Adoption CPA discusses Cash Flow | IRS Form 8839 and NC Form D-400TC

adoption CPA Wilmington NC Form 8839 and NC D-400TC

Gary Bode, CPA: the adoption credit is a great example of an IRS social incentive. For a free phone consult, call 399-2705.

Folks like to complain about the IRS. But, as an adoption CPA, I’ve watched this great social incentive expand from a $5000, non-refundable tax credit, to a $13,170 refundable tax credit. Very cool. Here’s our past post on Form 8839 and NC D-400TC.

“The Adoption Credit allows some folks to become parents who couldn’t afford to otherwise.” 
– Gary Bode, adoption CPA and tax accountant

Working the Adoption Tax Credit

I think many folks adopt without considering the tax credit, and are then grateful to recoup some expense from the IRS and State. Adoption is an emotional roller coaster and it seems logical to sort out the tax consequences later. But like any IRS issue, there are wrinkles. Parents should be aware of all the IRS issues to maximize their credit and then plan carefully. Adoption CPAs hear stories about parents disqualifying themselves inadvertently. It’s easier to comply proactively.

Cash Flow

The Adoption Credit kicks in after expenses are due;

  • Delayed by the timing of the adoption.
  • Delayed by the tax calendar year convention.
  • Limited to IRS allowed expenses.
  • In NC, limited to your current tax liability, although the non-refundable credit can be carried forward to future years

So, adoption expenses first come out of your pocket. For most folks, this takes careful planning and bridge financing. If you’re counting on the Tax Credits to pay back family loans, for example, the exact amount and timing is crucial.

What’s up for the Adoption Credit in 2012?

We don’t know yet. I doubt Congress will eliminate it.

I’m an adoption CPA in Wilmington NC with a virtual office to serve long distance clients. I can help, from cash flow planning all the way through to tax preparation. For a free phone consult, call (910) 399-2705.

Here’s the latest IRS info, cut and pasted.

Q.1 What is the adoption credit?

A. The adoption tax credit offsets qualified adoption expenses making adoption possible for some families who could not otherwise afford it. Taxpayers who adopt a child may qualify for an enhanced adoption tax credit for the years 2010 and 2011.

You may qualify for the adoption credit if you adopted or attempted to adopt a child and paid qualified expenses relating to the adoption. The amount of the tax credit is as much as $13,170 for 2010. You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.

For 2010, you may not get the full amount of the adoption credit if your modified adjusted gross income (MAGI) is $182,520 or more and the credit is completely phased out if your MAGI is $222,520 or more. IRS may make inflation adjustments to the maximum amount of the credit and the MAGI amount for the phase-out for 2011.

Q.2 What is the income exclusion for employer-provided adoption benefits?

A. You may be able to exclude from your income amounts paid to you or for you by your employer under a qualified adoption assistance program. You may qualify for the income exclusion if you adopted or attempted to adopt a child and the program paid or reimbursed you for qualified expenses relating to the adoption. The amount of the exclusion is as much as $13,170 for 2010. You may be able to claim the exclusion even if the adoption does not become final. Special rules apply for when to exclude the income for foreign adoptions.

For 2010, you may not get the full amount of the exclusion if your modified adjusted gross income (MAGI) is $182,520 or more and the credit is completely phased out if your MAGI is $222,520 or more. IRS may make inflation adjustments to the maximum amount of the income exclusion and the MAGI amount for the phase-out for 2011.

Q.3 What are qualified adoption expenses?

A. Qualified adoption expenses are reasonable and necessary adoption fees. They include: court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child.

Expenses paid in an unsuccessful attempt to adopt an eligible child before finalizing the adoption of another child can qualify for the credit.

Qualified adoption expenses do not include expenses: for adopting your spouse’s child, for a surrogate parenting arrangement, that violate state or federal law, paid using funds received from a federal, state, or local program, paid or reimbursed by your employer or any other organization, or allowed as a credit or deduction on a federal tax return.

You cannot claim a credit for the same adoption expenses used to claim the income exclusion.

Expenses connected with a foreign adoption (where the child was not a U.S. citizen or resident at the time the adoption process began) qualify only if you actually adopt the child.

Q.4 Who is an eligible child?

A. An eligible child is: a child under the age of 18, or an individual who is physically or mentally incapable of caring for him or herself.

Q.5 What did the Patient Protection and Affordable Care Act (PL 111-148) also known as the Affordable Care Act) change about the adoption credit?

A. Before the Affordable Care Act became law, the adoption credit was generally set to expire at the end of 2010. The credit was nonrefundable, but you could carry any unused credit forward up to five tax years.

The Affordable Care Act revised the adoption tax credit by: extending the credit’s expiration date to the end of 2011, increasing the maximum adoption credit and the amount you can exclude from income to $13,170 per child for 2010 (IRS can adjust the amount for inflation for 2011), and making the adoption credit refundable.

Q.6 What is a Refundable Credit?

A. A nonrefundable credit can reduce the amount of tax you owe (your tax liability) to zero but not below. A refundable credit can reduce your tax liability to zero and IRS pays back (refunds) any remaining credit to you. For example, if your tax liability is $10,000 and your credit is $12,000, with a nonrefundable adoption credit you would reduce your tax liability to zero and carry the remaining $2,000 credit forward. With a refundable adoption credit, you reduce your tax liability to zero and also receive a refund of the $2,000 by which your credit exceeds your tax liability.

Q.7 I have a carryover from earlier years. Is the carryover amount refundable in 2010?

A. Yes. If you carried forward an adoption credit from 2005 or later (because the credit was more than the tax you owed), you can claim the carried-forward amount as a refundable credit in 2010. You can find the amount of any unused carry forward amount on line 23 of the worksheet on page 5 of the 2009 Form 8839, Qualified Adoption Expenses.

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