Q: My partner and I will be having our first child via surrogate in a few weeks. We have heard one of us can file for the adoption tax credit next year. How does this work? Matt N.
A: Hi, Matt, Thanks for the question. The adoption tax credit was extremely beneficial for gay couples a few years ago. However, that has changed since the Supreme Court has ruled against the Defense of Marriage Act.
Before Supreme Court Ruling:
With DOMA in place, homosexual marriage was not recognized by the Federal Government, including the IRS. In most cases, one of the gay parents would be on the birth certificate, then the spouse would formally adopt the child to become a legal guardian. This allowed gay parents to claim an adoption credit and deduct related expenses.
The following expenses could be deducted or even REFUNDED.
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Travel expenses (including amounts spent for meals and lodging while away from home), and
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
Those expenses capped out at $13,460.
After Supreme Court Ruling
The IRS now formally recognizes the marriage of homosexual couples. This makes qualifying for the credit more difficult. “Qualified adoption expenses don’t include expenses that a taxpayer incurs to adopt the child of the taxpayer’s spouse.” –IRS Topic 607
This means if you are married in your state, your partner is now a spouse and the expenses cannot qualify for the Adoption Credit.
Here is the way to beat it: If you are not officially married, you can still apply for the credit. This excerpt has specific language regarding domestic partners. Qualified adoption expenses include expenses paid by a registered domestic partner who lives in a state that allows a same-sex second parent or co-parent to adopt his or her partner’s child, as long as those expenses otherwise qualify for the credit. – IRS Topic 607
It could be advantageous from a tax perspective to get married after the child is officially adopted and the credit claimed.
Adoption Credit for Married Couples
Even though married couples cannot claim the credit automatically, there are ways the credit can still be taken. Some states do not allow the intended parents to be placed on the birth certificate without adoption orders. This forces the parents to obtain a pre-birth or post-birth adoption order. The costs associated with those would qualify for the credit.
Again, those costs are:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Travel expenses (including amounts spent for meals and lodging while away from home), and
- Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
Those costs can also be spread out over multiple years. However, they do cap out at $13,460 per child, regardless of time. For example, if you have $3,000 in the first year, you can only deduct $10,460 the following year.
To claim the deduction, you will need to file Form 8839.
I hope this answers your question and gives you opportunities to save on your tax bill. With any complex tax law you should consult a local CPA to guide you through the process.
—Edward Brockschmidt, CPA & Co-Founder of SeedTrust Escrow
Every Friday, CPA and Co-Founder of SeedTrust, Edward Brockschimdt, will focus on “financial fitness” by answering the most commonly asked financial and tax questions relating to surrogacy and egg-donation.
If you have a question that you would like answered, please comment or drop us a line at [email protected] and we may answer your question in the upcoming weeks.
For additional answers to tax related questions please see Brock’s profile on JustAnswer.com by clicking here.
