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Understanding the Adoption Tax Credit

February 25, 2014 By Guest Contributor

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By Megan Asselin, CPA and Abigail Stokes Palsma

In most cases, taxpayers, whether single, registered domestic partners, or married couples, are eligible to claim a tax credit on the federal tax return for the expenses related to the adoption of a child. For the 2013 federal tax return, adopting families are able to claim qualified expenses up to $12,970. Additionally, families who adopt a child from a California Public Agency are eligible for a credit on their California tax return for 50% of qualified costs up to $2,500 per child.

The application of the federal credit varies based on whether the adopted child is in the foster care system, is a domestic child, or is a foreign child. The credit is not allowed when adopting a spouse’s child, however, there is an aggressive tax strategy that some may find helpful. Additionally, there are specific instructions for both the federal and state credits regarding how to claim expenses that occur over multiple years.

Basic Rules for the Adoption Credit

When adopting a child, it is important to keep track of all qualified expenses related to the adoption process. Qualified expenses as defined by the IRS include court costs, attorney fees, traveling expenses (including amounts spent for food and lodging while away from home), and other expenses directly related to the adoption of an eligible child. An eligible child as defined by the IRS, is any child under the age of 18 or any individual who is physically or mentally unable to care for himself.

On both the federal and California tax returns, qualified expenses are documented so that the taxpayer can receive a credit, which lowers the amount of taxes owed. Because the IRS and the California Franchise Board are two different taxing authorities, the same expenses can be claimed on both returns. Yet, because California offers the 50 percent credit only to those who adopt from a state agency and adoption fees are generally waived or very low for these types of adoptions, many adopting families do not receive a significant credit on their California tax return.

The tax credit is nonrefundable, which means that it is used only to decrease the total amount of taxes owed in a particular tax year. However, if the credit is greater than taxes owed, it can be carried over for up to five years on the federal return and until it is used on the California return. If that occurs, the taxpayer can use the tax credit against the tax liability in the subsequent year(s).

Adopting a Foster Child

While domestic and foreign adoptions can both be very expensive, adopting a child from a foster system is typically more affordable. In fact, state and county governments as well as qualified foster care placement agencies provide financial assistance for foster parents who are adopting the child(ren) in their care. Payments of this kind are generally excluded from the family’s income.

Regardless of the amount an adopting family spends, many foster adoptions qualify for the maximum credit if the child is defined as “special needs.” This does not mean that the child has physical or mental disabilities, but rather that he or she meets specific criteria, which might vary by state. In California, a foster child is considered to have special needs if she meets one of the following criteria. The child is/has:

  • Three years of age or older,
  • A race, ethnicity, color, or language that is a barrier to adoption,
  • A member of a sibling group that should remain together,
  • A mental, physical, emotional, or medical disability certified by a licensed professional, or
  • A parental background of a medical or behavioral nature that can be determined to adversely affect the development of the child.

For the California credit, the child must be a U.S. citizen and must be adopted from a California public agency (state, county, or city). Private adoptions and adoptions through a charitable organization do not qualify for the credit.

Case study: Mark and Larry are foster parents for a sibling group of two young children. Their charity-based foster agency provides monthly assistance payments, and now that they have decided to adopt the children, the payments have increased. Sibling groups qualify as “special needs” in a foster adoption. Even though Mark and Larry have received assistance from their agency and the costs related to the adoption process were relatively low, they are still able to claim the maximum adoption credit on their federal tax return for both children because of the children’s “special needs” classification ($12,970 x 2 = $25,940). In the tax year that Mark and Larry adopt the children, the potential credit available to offset their tax liability is $25,940. Because they adopted from an agency that is not a California Public Agency, they are not eligible for a credit on their California tax return.

Adopting a Spouse’s Child

As previously stated, the tax credit is available to be claimed when adopting an “eligible child.” The IRS definition of eligibility excludes the child of the taxpayer’s spouse. Certainly, a taxpayer may adopt his spouse’s child, but he will not receive a tax credit for related expenses. However, there is an aggressive tax strategy that some might find useful.

If the adoption is finalized prior to the marriage, but both the adoption and the marriage happen in the same tax year, the taxpayer can claim the credit. In this case, the child was literally not the child of the taxpayer’s spouse at the time of the adoption, making the child legally “eligible.” This could be confusing, if you are aware that the IRS considers married at any point in the year as married for the entire year. However, this provision only applies to certain Codes, such as the definition of a dependent and rate schedules. It does not apply to the adoption eligibility status of a child.

Caution: If a couple claims the adoption credit in the same tax year they are married, the IRS may perform an audit to verify that the adoption occurred before the marriage. Be prepared to provide documentation of both events should the IRS question the return.

Case Study: Marcia and Jane have been Registered Domestic Partners for five years. Jane has a ten-year-old daughter from a previous marriage, and Marcia legally adopted her in early 2013. After DOMA was overturned in 2013, Marcia and Jane decided to marry before the end of the year so that they could take advantage of the tax benefits married couples are eligible for. In order to receive the adoption credit, Marcia and Jane must file their federal tax return jointly, even though this draws attention to the fact that Marcia has adopted Jane’s child. The couple has kept clear records to show that the adoption was final several months before they married. Marcia and Jane do not use the same strategy for their California tax return. Even before DOMA was overturned, the State of California allowed for Registered Domestic Partners to file their state tax return jointly. In the eyes of state laws, they were provided the same tax benefits as married couples, including credits associated with dependents. Therefore, Marcia and Jane’s income has already been adjusted to account for costs associated with raising Jane’s daughter. Even if that weren’t the case, Jane’s daughter was not adopted from a state agency, so no state-based adoption credit is available to the two moms.

How to Claim the Federal Credit when Expenses Span More Than One Year

The federal adoption credit is limited to $12,970 in 2013 for each adoption effort. If costs for the same adoption effort occur in multiple years, the dollar limit for the subsequent year must be reduced by the amount claimed in the previous year. In other words, the most a family can claim for an adoption is the maximum amount allowed, whether all of the costs were incurred in the same year or multiple years. In the Instructions for Form 8839, Qualified Adoption Expenses, the IRS published the following charts that clarify when to claim expenses. A domestic adoption refers to the adoption of an eligible child who is a U.S. citizen. A foreign adoption refers to the adoption of a child that is not yet a citizen or resident of the U.S.

Domestic Adoption

IF you pay qualifying expenses in… THEN take the credit in…
Any year before the year the adoption becomes final The year after the year of the payment.
The year the adoption becomes final The year the adoption becomes final.
Any year after the year the adoption becomes final The year of the payment.
IF your employer pays for qualifying expenses under an adoption assistance program in… THEN take the exclusion in…
Any year The year of the payment.

 

Foreign Adoption

IF you pay qualifying expenses in… THEN take the credit in…
Any year before the year the adoption becomes final The year the adoption becomes final.
The year the adoption becomes final The year the adoption becomes final.
Any year after the year the adoption becomes final The year of the payment.
IF your employer pays for qualifying expenses under an adoption assistance program in… THEN take the exclusion in…
Any year before the year the adoption becomes final The year after the year of the payment.
The year the adoption becomes final The year the adoption becomes final.
Any year after the year the adoption becomes final The year of the payment.

 

For eligible California adoptions, the credit is available in the year the adoption becomes final. Expenses that were incurred in the prior taxable year can only be included in the computation of expenses in the year the adoption was finalized.

Case Study: Jack and Jill are adopting a domestic baby through a private adoption agency. They spent $3,970 in legal fees in 2012, but the adoption was not final, so they cannot yet claim the expenses on federal tax return. Because the agency is private, they are not eligible for the California credit. In 2013, they expect to pay an additional $12,000 to finalize the adoption. When they prepare their 2013 federal tax return, they may claim only the maximum $12,970, even though they spent a total of $15,970.

Case Study: Mike and Sue are adopting a foreign baby. They began the process in 2011, when they paid initial fees to the agency. They continued through the process and incurred the bulk of their expenses in 2012. They brought the baby home and finalized the adoption in 2013, incurring expenses for travel, as well as the final attorney, agency and court fees. Mike and Sue report all eligible adoption expenses incurred from 2011 to 2013 on their 2013 tax return and apply the $12,970 maximum credit to reduce their tax liability that year. Since the baby is not a U.S. Citizen, Mike and Sue cannot claim the California tax credit.

Case Study: George and Anthony adopted a foster baby through the Los Angeles County Department of Children and Family Services. Assume that adoption costs through this governmental entity are waived. Therefore, there is no credit to claim on the California tax return. However, because the foster baby fits the definition of “special needs,” George and Anthony are able to claim the maximum credit on their federal tax return, or $12,970.

Employer Adoption Assistance Programs

As noted in the preceding IRS charts, there is a second tax benefit available to adopting families who receive assistance through their employer’s adoption assistance programs. When an adopting family receives assistance through such a program, the amount received reduces qualified expenses and is also excluded from the gross income.

Case Study: Jennifer is adopting a domestic baby. Her employer pays $3,000 of her attorney fees through an adoption assistance program. When she files her federal tax return, she must reduce the amount of the qualified expenses by $3,000. This amount will also be excluded from her gross income since this is an employer benefit that is not taxed and has already been applied to the qualified expenses.

For more information about the adoption tax credit or to schedule a free 30-minute consultation, please contact Megan Asselin at MAsselin@vlsllp.com or 626-857-7300, ext. 309.

Megan Asselin, CPA is a Senior Manager at Vicenti, Lloyd & Stutzman LLP in Glendora, specializing in tax, audit, and general accounting services. Abigail Stokes Palsma is the Knowledge Manager for Vicenti, Lloyd & Stutzman. An earlier version of this article was published in February 2014 by Bienvenidos, https://bienvenidos.org/adoption-tax-credit/.

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How Grantland Helped Push a Transgender Woman Over the Edge

January 23, 2014 By Guest Contributor

transgolfBy Julian Cabrera and Josh Steichmann

A week ago, Grantland, a sports and culture website run by Bill Simmons, published a story by Caleb Hannan about a purportedly revolutionary putter invented by Dr. Essay Anne Vanderbilt, but Hannan was more fascinated with unraveling Vanderbilt’s mysterious personal life than her clubs.

He dug into her background, which she claimed was MIT physics with a dollop of top secret government work, but Dr. V got cagey, then angry. She pleaded and threatened, but Hannan kept going.

“The deeper I looked, the stranger things got,” Hannan wrote. And after tantalizing hints and incredulous foreshadowing, Hannan outed Dr. V as a transgender woman.

The story got stranger, and darker. Hannan learned that Dr. V had attempted suicide before, and her correspondence grew even more erratic. A few weeks after she last emailed Hannan, telling him he was committing a hate crime, Dr. V killed herself. Hannan describes Dr. V’s brother-in-law giving a brusque and cruel report of her death, then blithely wonders what it means about himself.

The backlash started nearly immediately, with Grantland editor-in-chief Bill Simmons writing a broad apology. In it, he acknowledged that Grantland and Hannan had made grievous mistakes.

“Caleb’s biggest mistake? Outing Dr. V to one of her investors while she was still alive. I don’t think he understood the moral consequences of that decision, and frankly, neither did anyone working for Grantland,” wrote Simmons.

“I didn’t know nearly enough about the transgender community — and neither does my staff,” Simmons wrote. “That’s not an acceptable excuse; it’s just what happened…We’re never taking the Dr. V piece down from Grantland partly because we want people to learn from our experience.”

Christina Kahrl, a transgender woman and baseball writer, wrote a blistering guest piece on Hannan’s article and Grantland’s carelessness.

“By any professional or ethical standard … it wasn’t [Hannan’s] information to share,” Kahrl wrote. “[He] really should have simply stuck with debunking those claims to education and professional expertise relevant to the putter itself, [and] dropped the element of her gender identity if she didn’t want that to be public information — as she very clearly did not.”

Kahrl also pointed out that the piece, aimed towards “mostly white, mostly older, mostly male audience,” did nothing but “reinforce several negative stereotypes about trans people.” And more than that, Kahrl also gave important historical context — up until fairly recently, transgender people were advised to adopt “deep stealth,” and completely abandon their previous lives in order to transition to their authentic gender identity.

“Stealth is tough to maintain, and generally involves trading one closet for another: You may be acting on your sense of self to finally achieve happiness, but the specter of potential discovery is still with you. And if you wind up in the public eye for any reason, stealth might be that much more difficult to maintain,” wrote Kahrl.

A story originally meant to be about a discovery that could have changed the world of golf unfortunately devolved into blind, unthinking privilege, and may have cost a woman her life.

More reactions: Shakesville: Careless, Cruel and Unaccountable.

Rebecca Schoenkopf: That Grantland Trans* Story.

Cyd Zeigler: How Grantland Failed the Trans Community.

Alyssa Rosenberg: Ten Questions Grantland Should Answer About Dr. V and the Magic Putter.

Paris Lees: Is it OK for a Journalist to Reveal the Birth Gender of a Trans Person?

Josh Levin: Digging Too Deep.

Update on the Referendum Attempt to Repeal the School Success and Opportunity Act

November 23, 2013 By Jesse Melgar

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The following is an update from Equality California Executive Director John O’Connor regarding the status of the referendum attempt:

Dear friends,

With your help, Equality California and our coalition partners tracked the activity of anti-LGBT groups over the past few months as they gathered signatures to repeal the School Success and Opportunity Act. We received calls and emails confirming what we already knew — our opponents were employing shameless and desperate scare tactics to collect, and ultimately submit signatures for a referendum.

Now, Equality California and our partners have been hard at work, carefully monitoring the results of their attempt to repeal this historic law that ensures all students, including transgender students, have the opportunity to fully participate and succeed in school.

Status of the Referendum Attempt:

As of Friday evening, the Secretary of State is reporting that they’ve received a total of 613,120 signatures from a majority of California’s counties. While there are still three small counties that have yet to submit signatures, the current total surpasses the threshold of 504,760 signatures needed to initiate the signature verification process.

That’s the phase we’re in now, but this does not mean the referendum has qualified.

Now, the Secretary of State’s Office has notified county elections officials that they will have to randomly sample signatures for validation, to ensure petitions were signed by registered voters.

The deadline to complete the random sample validation is January 8, 2014.

If the result of the random sample indicates that the number of valid signatures represents between 95% and 110% of 504,760, the Secretary of State would then direct the county elections officials to verify every signature on the petition. In this scenario, the verification process could go into mid-March of 2014. This process is referred to as a full check of signatures.

Moreover, at this stage, if the total number of valid signatures is less than 95% of the number of signatures required to qualify the referendum, the referendum will fail to qualify for the ballot.

If the number of valid signatures is greater than 110% of the required number of signatures, the initiative measure will qualify.

Currently, opponents are averaging 75.46% in the random sample, which is far below the average ultimately needed to qualify.

Because the purpose of the School Success and Opportunity Act is really to spell out the existing federal and state law so that school administrators, teachers, parents and students fully understand their responsibilities and rights, even if this referendum attempt were to qualify and pass — which looks more and more unlikely — those fundamental responsibilities and rights would not change.

Rest assured that regardless of the outcome of this referendum attempt, EQCA is committed to doing whatever it takes to defend this bill and protect the opportunities it creates for all students, including transgender students. 

We will continue to provide updates as they are made available. In the meantime, we strongly urge you to learn more about the School Success and Opportunity Act by visiting our coalition website: www.supportallstudents.org.

Very truly Yours,

John O’Connor

Executive Director

 

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They’ve submitted signatures

November 11, 2013 By Jesse Melgar

 

 

Dear friends,

Yesterday, our opponents submitted signatures in an attempt to overturn the School Success and Opportunity Act at the ballot box. The same people who spearheaded Proposition 8 – Frank Schubert and the National Organization of Marriage – are now going after the most vulnerable members of the LGBT community – our youth.

These fringe anti-LGBT groups have used every dirty trick in the book to collect hundreds of thousands of signatures. By distorting the truth about non-discrimination protections, they were able to scare voters into signing their petitions.

Join us by contributing to protect the School Success and Opportunity Act now!

The Secretary of State will verify the raw count of all signatures they submitted by Thursday, November 21st which our opponents have stated is close to 620,000. The Secretary of State has up to 38 business days to verify the signatures submitted by our opponents before she determines whether or not a referendum on the School Success and Opportunity Act will qualify for the November 2014 ballot.

We know that our opponents lie and that’s why we are waiting on the Secretary of State’s confirmation about the actual number of valid signatures submitted. Nonetheless, this is a very serious attack on our youth and we will do everything we can to protect the law.

In the meantime, Equality California, along with the co-sponsoring organizations of the law, will be monitoring the situation closely and preparing for all scenarios.

We refuse to let these attacks on our youth go unanswered. That’s why we need to continue to set record the straight about the law and combat these blatant lies. Over the past few months, you’ve helped us engage in tens of thousands of conversations about the law – on the phones and on the streets. But, it’s even more crucial now that we keep this up.

The campaign to overturn this historic law protecting our youth has been primarily fueled by wealthy out-of-state funders. A hedge fund manager from New Jersey, who gave over $1 million to Proposition 8, recently wrote checks totaling $200,000 toward this new attack on our rights. Our movement doesn’t have massive funding, but we have you – and we need your help in two specific ways – 1. fund our grassroots campaign to defend this law and 2. sign up to be on call as a volunteer.

Stand up to the right-wing money machine and donate $100 to help us spread the truth.

Click here to sign up to be a volunteer on call.

Regardless of whether they qualify for the ballot, our opponents will continue to attack our community – at the ballot box, in the legislature and in the courts of law. Equality California, along with our allies, remains vigilant and will continue to update you with any new developments.

Sincerely,

John O’Connor

Executive Director

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New life for ENDA in Congress

October 28, 2013 By Josh Steichmann

Cindy McCain signed postcard in support of ENDA

Passing a national Employment Non-Discrimination Act to protect lesbian, gay, bisexual and transgender employees has been a goal of LGBT advocacy for a generation, introduced in every Congressional session since 1994, with similar legislation dating back to 1974.

ENDA may be getting new life, with Senate Majority Leader Harry Reid readying ENDA for a Senate floor vote, and a growing effort to bring Republican support to the bill.

Even Cindy McCain is signing on, though her husband has yet to vote in favor.

But if the Senate can pass ENDA, the real question will be the GOP-led House. After an “autopsy” came out last year analyzing the dismal failure of the Republican party to attract young voters, one of the prescriptions was moving toward more support for LGBT equality, and an employment bill could be more palatable than something like marriage.

A staggering 80 percent of voters already believe that ENDA is law, and 56 percent of self-described Republicans favor passing ENDA, according to a new poll (PDF) from the Human Rights Campaign. However, Republicans in the House are even more conservative than Republican voters as a whole, so it’s hard to predict whether ENDA will gain sufficient traction to pass.

Angel Haze covers “Same Love”

October 24, 2013 By Josh Steichmann

Angel_haze Angel Haze covers Macklemore’s “Same Love” and raps about queer sexuality beyond boundaries. https://soundcloud.com/angelhazeym/same-love-angel-haze

STAY DENIED! MARRIAGE COMING MONDAY TO GARDEN STATE

October 18, 2013 By Josh Steichmann

Freedom to marry garden stateCongratulations to loving same-sex New Jersey couples — the New Jersey Supreme Court today held that same-sex couples can marry starting Monday at 12:01 a.m., denying a stay while the court case winds its way through the appeals process.

In their decision, the Court wrote: “What is the public’s interest in a case like this? Like Judge Jacobson, we can find no public interest in depriving a group of New Jersey residents of their constitutional right to equal protection while the appeals process unfolds.”

The long, winding road to the freedom to marry in New Jersey began in earnest in 2002, when Lambda Legal filed Lewis v. Harris, which ended in 2006, with the NJ Supremes ruling that loving same-sex couples couldn’t be denied the rights and privileges of marriage without explicitly mandating the freedom to marry. The New Jersey legislature enacted civil unions, but Garden State Equality, New Jersey United for Marriage and Lambda Legal have been working since then to get full marriage.

The current case, Garden State Equality v. Dow, was filed in 2011, and on September 27, the New Jersey Superior Court found that in the wake of the Defense of Marriage Act case, civil unions no longer provided the same protections and benefits that marriage did, ruling that all loving couples in New Jersey must be allowed to marry, setting the effective date as October 21.

National Latino AIDS Awareness Day

October 15, 2013 By Jesse Melgar

AIDSAWARENESS

Equality California is proud to observe National Latino AIDS Awareness Day (NLAAD) today. Established in 2003, NLAAD is dedicated to raising awareness about the impact HIV/AIDS has on the Latino community. The 2013 theme is “Commit to Speak”/“Comprométete a Hablar”. Every October 15th, the last day of Hispanic Heritage Month, partners across the United States raise their collective voice to promote HIV/AIDS education, prevention, testing, treatment, and overall awareness for Latino communities.

According to the U.S. Centers for Disease Control and Prevention, the HIV infection rate among Latinos in 2009 was nearly three times as high as that of caucasians. As the Latino community grows exponentially, it is essential to address this epidemic head on if we hope to create an AIDS-free generation.

Visit the National Latino AIDS Awareness Day website to learn more (NLAAD). To find an HIV/AIDS testing site in California, click here.

 

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Harvey Milk to be Honored on U.S. Postage Stamp

October 10, 2013 By Jesse Melgar

Milk

The United States Post Office confirmed today that Harvey Milk will be the first proudly out elected official to grace a postal stamp, joining a myriad of lesbian, gay, bisexual and transgender icons already recognized on postage, including Tennessee Williams, Keith Haring and Willa Cather.

The stamp will reportedly feature Milk’s slogan, “Hope will never be silent.”

The decision came after a multi-year push from the LGBT community to honor Milk with a stamp.

In 2009, Equality California sponsored SB 572 which was authored by Senator Mark Leno and signed into law by Governor Jerry Brown declaring May 22 Harvey Milk Day in California.

This is a tremendous honor who’s spirit is alive and well. And who says philately will get you nowhere?

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Gov. Brown Signs Law Making Accurate ID Easier for Transgender Californians

October 8, 2013 By Josh Steichmann

ab 1121It just got a little bit easier (and cheaper) for transgender Californians to live authentic lives.

Governor Jerry Brown just signed AB 1121, written by Assemblymember Toni Atkins, which streamlines the process for documentation changes, specifically name and gender changes on ID like driver’s licenses and vital documents like birth certificates. The law was cosponsored by Equality California and the Transgender Law Center.

Up until now, changes to birth certificates required a court hearing, and now California is in line with many other states that only require an administrative action, in this case from the Office of Vital Records. Since the court filing fee is $435, and the courts are already overburdened with actual cases, this is a win-win for transgender Californians and good governance.

The law also changes the requirement of public notice, which for many transgender people requires outing themselves to their entire community, which may not be safe and at the least is an unnecessary hassle.

“One step in enabling transgender people to live authentic lives consistent with their gender identity is to ensure that their names and their official documents are consistent with who they are,” said Atkins. “I am very pleased that the Governor signed my bill to move us forward toward equality and dignity for transgender Californians.”

“Today California made it easier for people who are transgender to live authentic lives by removing unnecessary barriers to name changes and identity documents,” said John O’Connor, EQCA executive director. “This is a common sense solution to ensure that transgender Californians are treated fairly and with respect. We thank Gov. Brown and Assemblymember Atkins for their leadership.”