Author Topic: Tax Related Issues For Adoptions And Foster Care  (Read 2781 times)

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Offline floridamcmarion1

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Tax Related Issues For Adoptions And Foster Care
« on: April 18, 2006, 09:32:39 PM »
Adoptions and foster care create their own tax related issues.  This is the place to discuss this subject.  Share things you have discovered or ask questions of those who have been there and know most of the related tax rules.

Marion

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Offline floridamcmarion1

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Re: Tax Related Issues For Adoptions And Foster Care
« Reply #1 on: April 18, 2006, 09:50:43 PM »
If you adopt a child through foster care that is considered special needs by the definition of your state of residence you are able to claim the special needs adoption tax credit.  This credit is given regardless of expenses.  You get to claim the maximum adoption tax credit for that child even if you didn't actually incur any expenses related to the adoption.  While this credit is not considered a refundable credit (you may only use the amount up to your total tax liability for that year), you may carry over the remainder for up to 5 years.  The current adoption tax credit is $10,360.  When you use this credit you want to apply it first to offset any tax liability you have.  After that is applied, then apply any refundable credits you might have (child tax credit, etc.). 

By using this credit, as well as the child tax credits we get for having dependent children, we have seen a huge change in our yearly cash flow from taxes.  The different credits and deductions have resulted in an about $10,000 per year change.  That is equivalent to adding about $750 per month (tax free) to our income.  Because of the number of adoptions we have had, as well as the ability to carryover the unused credit each year, we will go 7 years without paying any federal income tax.

Marion

"Some people collect stamps.....but me....I collect children.  If I collect any more I'll have to trade my van in for a bus!"

Offline floridamcmarion1

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Re: Tax Related Issues For Adoptions And Foster Care
« Reply #2 on: April 18, 2006, 09:59:56 PM »
If you have a foster child in your care the entire calendar year and can prove that you provided over half of their financial support (amount of state support checks plus $1) from your own pocket you may claim them as a dependent on your federal income taxes.  That means you not only get the dependent deduction, but also get the child tax credit.  In considering the amount of support you provide you get to prorate the cost of household expenses (utilities, mortgage, homeowners insurance, food expenses, etc.).  Make sure to keep your receipts in case you get audited.  You will need enough receipts plus justifiable prorated expenses to equal twice the amount the state paid you plus $1.  This is not hard to do, but you must save every receipt that has any household item, food, etc.

Marion

"Some people collect stamps.....but me....I collect children.  If I collect any more I'll have to trade my van in for a bus!"

jeremy

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Re: Tax Related Issues For Adoptions And Foster Care
« Reply #3 on: April 18, 2006, 10:19:24 PM »
good information....you sound like a seasoned vet

Offline floridamcmarion1

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Re: Tax Related Issues For Adoptions And Foster Care
« Reply #4 on: April 18, 2006, 10:38:40 PM »
If you cannot claim a foster child as a dependent (either they did not live with you the entire calendar year or you did not spend twice the amount the state paid you plus $1) you may still be able to claim some of the amount you spent  as a charitable donation.  You may only claim material items purchased directly for the child's use such as clothing, books, toys, Christmas presents, birthday presents and other material items purchased specifically for that child's use.  These items must go with the child should they be moved from your care.  You may only claim the charitable donantion deduction for the amount of receipts you have over the amount you were paid by the state (If you spent $2,000 on the child and the state paid you $1,600 that year you may claim a charitable donation deduction of $400).  Make sure you keep very good records if you do this in case you are audited.

Marion

"Some people collect stamps.....but me....I collect children.  If I collect any more I'll have to trade my van in for a bus!"

Offline floridamcmarion1

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Re: Tax Related Issues For Adoptions And Foster Care
« Reply #5 on: April 19, 2006, 11:02:02 AM »
If you are using an adoption agency to do a private adoption you will usually have to pay a non-refundable fee when a specific child is identified for you.  If that adoption fails you may still claim the amount of the non-refundable fee as an adoption related expense.  You will list it on your tax form as an adoption expense with the explanation of "Failed Adoption" instead of listing your new child's name.  As long as the fee does not exceed the maximum adoption tax credit you may claim the entire amount as an adoption tax credit.  This amount will then be deducted dollar for dollar off of your tax liability. 

Marion

"Some people collect stamps.....but me....I collect children.  If I collect any more I'll have to trade my van in for a bus!"

Offline floridamcmarion1

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Re: Tax Related Issues For Adoptions And Foster Care
« Reply #6 on: April 19, 2006, 11:11:30 AM »
If you adopt a child who is not considered special needs by your state you may claim the adoption tax credit on your federal taxes for the amount you spent related to the adoption, up to the maximum amount allowed by law.  Currently that is $10,360 per child (twins, for example, would be considered individually).  You may claim all of the funds you pay the adoption agency for their services, as well as any money spent on the birth mother during her pregnancy or immediately after.  For example, we were able to claim the amount we paid to buy maternity clothes for our daughter's birth mother.  We also claimed the amount we paid for groceries when the birth mother went home from the hospital after the birth (she had no money, no income, and no food in the house), as well as the steak dinner we brought her in the hospital the day after she gave birth.  If you spend money related to the adoption in any way you may claim it as long as you don't exceed the maximum credit allowed.  In most private adoptions you will spend more than the allowed credit, though not always, so make sure you keep every receipt just in case.

Marion

"Some people collect stamps.....but me....I collect children.  If I collect any more I'll have to trade my van in for a bus!"

 



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