How’s that for a title. I’m not a tax preparer; this isn’t legal advice, yhada, yhada, yhada. But I have read more than I care to think about regarding taxes and adoption and I can point you to the right places, so lets proceed (btw, if you read Mary’s post last week about adoption taxes and my comments, you’re probably not going to learn anything new, but check out the contest under qualifying child before you leave.
Adoption Tax Credit
The adoption tax credit for tax year 2006 is $10,960 per child. Save all your receipts from the very beginning. If you’re adopting internationally and your child comes home on an IR-4, you get to take the credit in either the year that your adoption is finalized in the foreign country OR the year that it’s finalized (re-adoption) in the US. Some countries (Russia?) don’t finalize the adoption in the foreign country and make you your child’s guardian. In those cases, you have to use the year of the US finalization since you didn’t technically adopt the child in any other year. For domestic adoptions, you’re lucky and get to take the adoption credits in the year that you accrued the expenses.
Why might you want to delay the credit? You only get to use up the credit for 5 years. If you’re adopting more than one child and you can’t use all the credit in 5 years, you can essentially get 6 years to use the credit, by delaying one of the adoptions until the second year (assuming you re-adopt the following year). If you were really trying to maximize your tax credit usage, you could extend it out by waiting even longer re-adopt (although we’ve decided that being done with adoption paperwork is worth whatever benefit we might have in 6 years).
Also, the tax credit is going up in TY2007 to $11,390, so theoretically if your expenses were more than $10,960, you could get a larger tax credit by waiting until next year to take the credit.
This is less cut and dry. Some people claim that you can claim them as a qualifying child in the year they are adopted just like you would if they were born into your family. I read the rules as being more strict than that (see below). If you can find an IRS ruling that says otherwise, I’ll give you $100. My threshold for this is that I believe it enough to go back and refile our taxes claiming Yordie as a qualifying child.
The rules state that for you to have a qualifying child, your child must meet the following 5 cases:
- Relationship – their your kid, so no problem here
- Age – they’re probably under 18, so OK here too.
- Residency – see below
- Support – unless you start them off in their modeling business right away, you’re probably OK.
- Special test for qualifying child of more than one person – Unless you divorced right after you adopted, you should be fine here too. Maybe married filling separately would also need to look at this, but I’ve never understood why anyone would do that….seems like twice the work.
Now residency is probably the only issue that adoptive parents are going to have. If your child comes home before July 1st, then you’re set for this one. If your child was born in 2006, you’re set for this one because there’s an exception for that (also for kidnapping and going to school, but hopefully those don’t apply to adoptive parents). Under my reading there is no exception for kids joining your family in the year after July 1st (they still need to live with you half the year, just like a biological child over the age of one would).
But what if your kid comes home in July or Aug? Well, you might be able to claim them as a dependent as a “qualifying relative”. The 4 things required are:
- Not a qualifying child test – no problem, that’s why we’re trying to go this route
- Member of household or relationship test – their your kid right?
- Gross income test – again, the modeling career
- Support test – you have to provide more than 50% of the childs support for the year
Since the cost of living is lower in the country you adopted from, you’ll most likely be able to claim your child as a qualifying relative. How late you can go and still claim this, I’ll leave up to you. We were 7 months in Ethiopia and 5 months in the US. I’m pretty sure Yordie’s share of the mortgage alone is enough to make the latter more costly.
Buy qualifying relatives don’t qualify for the child tax credit or the child care tax credit, so you won’t be able to claim those in your first year home.
Claiming them as a dependent should be independent of claiming the tax credit (assuming you’re their legal parent (according to some country) and not their guardian). So you can claim them as a dependent this year and take the credit next year if you’re readopting next year (and came in under an IR-4).
That’s it. Good luck. Make sure you check out all the links; you don’t want to trust a complete stranger who’s a self-proclaimed un-expert.