Financial Aspects of Adoption: How Income ,Taxes and Savings are Impacted by Adoption- Michael Garrison

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Michael: I have spent over 23 years working in the field of taxation. For six years I worked for the IRS and for the last 17 years I have worked in the private sector first a tax manager for a national estate planning firm and currently, as the owner of my own tax business in Lawrenceville, GA. I serve on the board of the Georgia Chapter of the National Association of Tax Professionals. (NATP)

Michael: My wife and I have two adopted children. They were placed with us from the Georgia Foster Care System.

Shannon H: Well, this is certainly a timely topic for us to discuss tonight, so please feel free to begin where you wish in regard to how adoption affects our taxes, etc.

Michael: In the pre adoption phase you are looking at the cost of the adoption and ways to cover those cost.

Michael: Post placement the day-to-day cost start to hi and then post adoption there may be both everyday cost of raising children and also special cost due to the adoption.

Shannon H: What are some of the things to know about if the child has been in your home and is expected to be adopted? Anything a family can do before finalization occurs to get a tax break?

Michael: Once the child has been placed in your home by an agency for the purpose of adoption you may be entitled to claim the child on your tax return.

Michael: Depending on the age of the child this will allow an additional exemption and may result in you being able to claim the child tax credit of $1000.

Shannon H: Alot of people are surprised by that, I am sure. What happens if the placement doesn't continue, though? How is that remedied the next year?

Michael: Well here we are talking about children placed for adoption. It is more than likely that this will move forward to finalization.

Shannon H: You mentioned the age of the child is a factor. Can you elaborate?

Michael: But the IRS would look at what the situation was on December 31st.

Michael: Dependent children under the age of 17 qualify a parent for the Child Tax Credit. If the parent's income is low it may also allow the parent to receive the Earned Income Tax Credit.

Shannon H: How would a family know if their income were eligible for this?

Michael: I would like to make it clear that children placed for adoption must meet all five test to be a dependent.

Michael: The earned Income Credit would be for families with earned income less than $36,000

chatadmin: What are some of the pitfalls parents should avoid when filing for tax return.

Michael: The area that I find most exciting is the post adoption phase. That is when the Adoption Tax Credit can greatly effect your tax return.

Shannon H: I wanted to revisit the question of the five tests. Could you state what those are?

Michael: To bannswer the admin's question, some preparers may not be familiar with the rules that concern claiming a child that has been placed for adoption.

Kim: Does the IRS have a website that families can visit to see how the adoption credit works.

Michael: To claim a person as your dependent they must really meet six test. 1. Member of the household. 2. Age test 3. Relationship Test 4. Citizenship Test 5. Joint Return Test 6. Gross Income

Michael: Even if the adoption is not final, the child is considered your child if the child was placed with the taxpayer for legal adoption by an authorized placement agency.

Michael: The child must be a member of your household, but not for the entire year.

C spivey: how would that effect children from other countries that are placed for adoption?

Michael: The adoption Tax Credit is an effort by the Federal Government to encourage adoption in this country. It allows a tax credit of up to $10,960 for the adoption of a child. This applies to a maximum of two children per year.

judy: If expenses are incurred over 2 calendar years, can the expenses be deducted both years or only in the year the adoption if final?

DTaylor: As a tax credit does that mean it comes off of your tax liability, or does it reduce your taxable income?

Michael: c spivey, I believe that children from another country would not qualify as a dependent until the adoption was finalized.

Michael: The adoption tax credit allows a credit for adoption related expenses up to $10,960 per child.

Michael: For Special Needs Children the credit is allow without the need for adoption related expenses.

Shannon H: Many children from other countries are officially adopted in that country, but not all. Therefore, they are qualified, I believe.

Shannon H: Can we refer back to Judy's question regarding the two year period? What can you tell us about that?

Michael: As an example when we finalized the adoption of our two Special Needs children we received a tax credit of $21,920 that we were able to use to reduce our taxes. The unused credit carries over for the next five years.

Michael: Shannon, it is also my understanding that foreign adoptions are usually completed before the children return to th USA.

Shannon H: If it goes over more than one year, then, tax credits can be ongoing?

Michael: For domestic adoptions the expenses are allowed in the tax year following when the expenses are incurred. In the year of finalization the expenses produce the credit and they are also allowed in future years if expenses are incurred post finalization.

Michael: I foreign adoptions the expenses are used only in the year the adoption is finalized.

Michael: Foriegn adoptions are final when you receive a IR-3 visa for the child.

Michael: When you receive a IR-4 it is final when a US court issues a final decree

Michael: an IR-2 Visa is final when your home state court enters a decree of re-adoption.

Michael: Shannon there are not any new tax breaks that I am aware of but the good news was that the Adoption Tax Credit was renewed in last years legislation. It had been due to expire.

Shannon H: That's what i heard. Good to know it was renewed. What websites are available for review of tax credits, etc. regarding adoption? We have so little time left, it might be good to share those now.

Michael: For more information I would go to the IRS website www.IRS.gov and download the publication on adoption.

judy: Is the Adoption Tax Credit now permanent or does it expire in a few years?

Michael: We don't know judy. this type of thing has to be renewed from time-to-time or it expires. Due to the number of children in Foster care I don't see it going away soon.

Shannon H: In seeking a tax preparer, what questions should be asked so that they can be sure of a family's needs?

Michael: There is also a really good packet available from the National Clearinghouse on Child Abuse and neglect called Adoption General Information Packet 2.

Michael: I would ask up front if they are aware of the Adoption Tax Credit. Their response will quickly tell you if they are up-to-date on this topic. I am an Enrolled Agent (EA) we are people who have passed an IRS exam. They can be found in your phone book or by contacting the National Association of EA's

Shannon H: You are certainly a wealth of terrific information regarding this topic, but unfortunately we need to end shortly. Are you available to bannswer other questions, and if so, how can someone contact you?

Michael: You may also go to the National Association of Tax Preparers website at www.natptax.com. There you can search for a qualified person in your area.

Shannon H: We have a few minutes left. Any last thoughts or questions, anyone?

Michael: I can be contacted at my office 678-215-9501, by fax at 678-868-1037 or by email at mlgarri@mindspring.com.

Shannon H: Thank you so much for your input into this timely information. Just in time for tax season! Thank you again!

C spivey: thank you for the help, wish the tax laws were changed when we adopted

Michael: One thing that happened when we adopted was that our friends threw showers for the kids. I found this to be a wonderful way for the kids to see how may people cared about them.

Shannon H: And to show that they were embraced by their community and support system! Thanks.

Michael: If your friends offer consider having a money tree instead of everyone giving toys. Or ask that people give gift cards for book stores or walmart. It certainly helps.

Financial Aspects of Adoption: How Income ,Taxes and Savings are Impacted by Adoption- Michael Garrison

Tuesday, the 7th of February 2006