Published April 27, 2012
Julie and Brett Redden are in a hurry for the paperwork to go through for the 6-year-old girl they are planning to adopt from China.
It's not just that they are impatient to start their lives with her as she joins an 11-year-old sister adopted from China two months ago. The Reddens are also playing a game of "beat the clock" so they can take advantage of a generous federal adoption tax credit.
They have already missed out on the refundable 2011 credit, which allowed tax savings of as much as $13,360 per child. In 2012, the credit is $12,650 and not refundable -- meaning if their total tax bill is less than the amount of the credit, they will not get additional money back from the Internal Revenue Service.
But the Redden's real worry is that the adoption will not be completed by year's end. And unless Congress acts, that credit will expire on Dec. 31, 2012.
"We are not rich. We are very middle-income, and we have scraped and saved and done everything humanly possible to bring these girls home," said Julie Redden, a 31-year-old teacher in Houston.
Redden said she expects adoption costs for both girls to top $50,000, and there will be ongoing medical expenses because both have special needs -- the older child is legally blind, while the younger one has cerebral palsy.
"The tax credit will be enormously helpful to pay for medical bills," Julie says.
The rules shift regularly on the adoption tax credit, making planning difficult, especially when combined with the uncertainties of adoption itself, which can typically cost $25,000 or more and take months to years to complete.
"The adoption tax credit has never been a permanent part of the tax code, so every year, or few years, you have to deal with what's going to happen it," Chuck Johnson, president of the National Council for Adoption, said.
This year, the credit is not refundable but families that cannot use the entire credit in 2012 can carry the unused credit forward for up to five years, using it to offset their income taxes through 2017.
Next year, without an extension, all that will remain of the adoption tax credit will be a much smaller $6,000 credit for domestic adoption for children classified as having "special needs," a determination made at the state level.
If that sounds confusing -- it is.
Last week, in an early legislative effort to deal with the adoption credit's changeability, Rep. Bruce Braley, an Iowa Democrat, introduced a bill that would make a $13,360 refundable adoption tax credit permanent.
Mark McDermott, a Washington, D.C., adoption attorney who serves as legislative director of the American Academy of Adoption Attorneys, believes there will be a credit in 2013, but that it will be enacted as part of a larger tax and finance bill.
"I don't think any stand-alone bill will pass," McDermott said. "That's the way things happen on the Hill."
Not surprisingly, there has been confusion over the rules and processing delays.
"It's quite a rich benefit," said Kathy Pickering, executive director of the Tax Institute at H&R Block. "We've had a number of conversations with the folks at the IRS because there is still a lot of confusion around the rules. Some people have not been claiming that credit, or not been claiming the full benefit."
To claim the credit, file Form 8839 along with supporting documentation. The paperwork varies, depending on whether you are adopting domestically or internationally and whether you are adopting a special-needs child. Parents who should have qualified for a 2011 credit but missed it can file an amended return to maximize their savings.
(For more details, see: http://www.irs.gov/taxtopics/tc607.html )
For a regular adoption, whether domestic or foreign, you can claim the credit up to the amount of your expenses (including adoption fees, attorneys fees, court costs, travel expenses, etc). While for a U.S. special-needs child you may qualify for the full amount of the credit even if you paid few or no adoption-related expenses.
In 2010, nearly 100,000 taxpayers claimed the credit for a total $1.2 billion.
Expect the IRS to take its time examining your return. Roughly 68 percent of those who claimed the credit in 2010 were subject to what the IRS calls a "correspondence audit," a request for more information, according to a U.S. Government Accountability Office (GAO) study. Only 17 percent of them were assessed additional tax, and in no cases were the adoption credits claimed fraudulently.
"IRS used a disproportionate share of its audit resources on the adoption credit," the GAO report said.
When Kelly and Jeff Elliott claimed the tax credit for adopting their now 2-year-old daughter Kaylee from Ethiopia in 2010, the process dragged out for months.
"They wanted to see piece of paperwork after piece of paperwork. It got kind of ridiculous," Kelly recalled, noting that they did ultimately receive a check for the full credit.
The Elliotts, who live in Klamath Falls, Oregon, are in the process of adopting three Ethiopian siblings. Kelly said that with all the costs of adoption, they hope to get the full credit again.
With a big family and a middle-class income -- Jeff is a munitions supervisor at the nearby Air Force training base, while Kelly works a few hours a week as a Head Start consultant -- they would like to buy a car that would fit their whole family.
"The credit would be a godsend this year," Kelly said. (Amy Feldman; Editing by Chelsea Emery, Linda Stern and Maureen Bavdek)