Question

Daddy Warbucks is in the process of adopting Annie from a New York orphanage. He pays $7,000 in 2017, and $7,500 in 2018. Daddy Warbucks’ AGI for 2018 is $165,000. ​

a. How much is the adoption credit that Daddy Warbucks may claim for 2018 if the adoption becomes final in 2018?

b. How much is the adoption credit that Daddy Warbucks may claim for 2018 if the adoption becomes final in 2019?

c. How much is the adoption credit that Daddy Warbucks may claim for 2018 if the adoption falls through and is never finalized?

Answer 1

Solution :

As per Internal Revenue Service(IRS) (Topic Number 607) Adoption Credit and Adoption Assistance Programs rule - Tax benefit is provided on satisfactions of below mentioned conditions :

• Its a Qualified Adoption expense viz adoption fees, attorney fees, travelling expenses & other expenses directly related to child adoption.
• The child is an eligible child i.e one below 18 years of age
• Modified Adjusted gross Income (AGI) is below $207,140
• Adoption is finalized i.e it is expected that adoption will materialize
• Adoption if domestic-expenses can be allowed in every subsequent year of expense incurred upto $13,810 untill adoption is final
• Adoption if foreign - expenses can be allowed in year adoption is final

If the above mentioned conditions are fulfilled an Individual can claim Qualified adoption expenses incurred as credit upto maximum $13,810 as adoption credit or employee can also exclude from his/her AGI if adoption is supported by Employer.

Also in case all $13,810 not utilized in year of expense it can be carried forwarded upto next 5 years uptill limit of $13,810 exhausts. So in case $2500 incurred in 2016, $5500 in 2017 & again $2000 in 2018 so claim can be made in 2017 for $2500 and in 2018 for total($5500 + $2000) as adoption finalized.

Also in 2019 for both domestic & foreign adoption an individual is given additional $2000 credit if AGI below $207,140.

Note :

However if Qualified adoption expense is greater than $ 13,810 like as under credit allowed would be as follows,

• if Qualified adoption exp. $16,000 and employer reimburses $ 2,190 then Adoption credit allowed is whole $13,810
• if Qualified adoption exp. $27,620 and of which employer reimburses $13,810 so employee can now claim credit of balance $13,810 as adoption credit and employer support is excluded from employees AGI.

Solution :

a)

In this case AGI is $165,000 which is below AGI $ 207,140 hence credit allowed is $ 13,810.

Calculation of allowable expense :

Adoption expenses in 2017 = $ 7000

Add: Adoption expenses in 2018 = $ 7500

Total expense = $14,500

Note : assumed its for domestic adoption and whole $ 14,500 is borne by individual and no reimbursement received from employer.

However allowable adoption credit is $13,810. Thus additional expenditure of $690 is to be borne by individual as no relief allowed for additional expenditure.

So Daddy warbucks can claim credit for $ 13,810 in year 2018.

b)

Calculation of allowable expense :

Adoption expenses in 2017 = $ 7000

Add: Adoption expenses in 2018 = $ 7500

Total expense = $14,500

Note : assumed its for domestic adoption and whole $ 14,500 is borne by individual and no reimbursement received from employer.Allowable adoption credit is $13,810. However as per Topic 607 if in year 2019 individual is allowed
additional Credit of $2000 if only qualified adoption expense incurred in 2019.

So allowable expense now in 2019 is $13,810 + $2000 = 15,810

So Daddy Warbucks can claim credit for whole $14,500 in 2019.

c)

In case adoption fails in 2018 adoption credit allowed is for the expense incurred in 2017 as per IRS instruction.Thus in case of failed adoption Daddy Warbucks can claim credit for $7000 only in 2018.