For 2010, Congress decided to enhance the adoption tax credit by making the tax credit larger for the years 2010 and 2011 and by making this tax credit refundable. One question I've heard quite frequently is, will carried over adoption credits from previous years be included in the refundable portion of the adoption credit for 2010. There's some exceedingly good news on this particular topic.
Carryover Credits are Refundable
"An amount of an adoption credit claimed in an earlier taxable year that a taxpayer carries forward to a taxable year beginning in 2010 is allowable as a refundable tax credit," according to interim guidance released by the Internal Revenue Service (Notice 2010-66). Before this particular tax credit was revised as part of the health care reform legislation, any adoption credits in excess of a person's federal tax liability could be carried over to the following year, where in offset that year's tax. And if there were still excess credits, the adoption credit would continue to carry over for up to five years. But now that the adoption credit is refundable, any carried over credits from previous years can be cashed out, so to speak, on the 2010 tax return.
Substantiating Documents Now Required
The Internal Revenue Service also announced further guidance regarding the adoption credit. Starting with 2010 tax returns, people will need to submit documentation with their tax return to prove they are entitled to the adoption credit. Individuals will need to attach copies of various documents to their tax return and mail their tax return to the IRS for manual processing. That means, taxpayers who are claiming the adoption credit will not be eligible to electronically file their return. Acceptable documents to substantiate that an adoption has become final include:
- An adoption order or decree,
- A Hague Adoption Certificate,
- An IH-3 visa, or
- Foreign adoption decree translated into English
If an adoption is not yet final, taxpayers will need to include documents such as:
- An Adoption Taxpayer Identification Number for the child,
- Completed home study by a placement agency,
- Hospital document authorizing the release of a newborn to the adoptive parents,
- A court order, or
- An affidavit (original) or statement (notarized) from an adoption attorney or government official
Individuals can claim the full amount of the adoption credit ($13,170 for 2010) for a special needs child, even if the person hasn't spent the full $13,170 on out of pocket adoption expenses. Such taxpayers will need to include a copy of the state determination of special needs.
Because these adoption papers may contain sensitive information, the IRS will permit the adoptive parents to "redact sensitive personal information from an adoption order or decree or a special needs determination," although the IRS says they want still want to see the unredacted version should the need arise.
2010 Forms Available for Preview
The IRS also released a draft version of the 2010 Form 8839, Qualified Adoption Expenses. As you can see at the bottom of page 1, the 2010 adoption credit will be the sum of the 2010 adoption expenses plus the amount carried over from 2009, and the total will be sent to line 71 of the 2010 Form 1040 (draft version), where it will be treated like a payment.