December 15, 2011

Question: Janice and Ross have finalized the adoption of their baby girl, not a special needs child, just after Thanksgiving of this year. They have incurred expenses of over $20,000. In previous years, they incurred $13,000 and $12,000 of adoption expenses for the adoption of their other two children, which were final in 2007 and 2008, respectively. The expenses they incurred from the previous two adoptions were available for the adoption credit, however they were unable to take the adoption credit because their tax liability was already reduced to zero for those years. They are wondering if the refundable adoption credit is available for 2011 and if the expenses incurred from 2007 and 2008 were available for the refundable credit even though they never included the carry forward of those expenses in the previous year's tax returns.

Answer: The refundable adoption credit is available for only two tax years, 2010 and 2011. Therefore, Janice and Ross can take advantage of the adoption credit on their 2011 tax return even if their tax liability is already reduced to zero. The expenses incurred for the adoptions in 2007 and 2008 can be carried forward for five years and can be used in calculating the amount of the refundable tax credit, however these expenses should have been claimed in 2010. Janice and Ross should amend the tax returns for the years that are still open to reflect the carry forward of these expenses. For any closed year all the proper documentation should be available to prove the adoption expenses were incurred. Their 2010 tax return should be amended to claim the refundable adoption credit in 2010 for the expenses they incurred in 2007 and 2008. Each year the IRS identifies a maximum amount of adoption expenses that can be used to claim the credit, for instance the maximum amount for 2007, 2008 and 2011 is $11,390, $11,650 and $13,360, respectively. Janice and Ross could receive a refundable credit up to $23,040 and $13,360 for 2010 and 2011, respectively. This credit reverts back to being a nonrefundable credit in 2012.