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CCH® BENEFITS — 10/04/10

IRS Addresses Affordable Care Act Changes To Adoption Benefits

from Spencer’s Benefits Reports: In a September 29 newsletter, the Internal Revenue Service announced two revenue procedures and one notice addressing changes to the Sec. 23 adoption tax credit and the Sec. 137 employer-provided assistance exclusion made by the Patient Protection and Affordable Care Act (ACA). The ACA redesignated Sec. 23 as Sec. 36C after 2009 and also made the tax credit refundable for tax years 2010 and 2011.

Increased Maximums

Rev. Proc. 2010-35 addresses the new maximum allowable amounts. For taxable years beginning in 2010, ACA Sec. 10909(a)(1) increased the maximum adoption credit and the maximum adoption assistance exclusion from $12,170 to $13,170. This amount may be adjusted for inflation for taxable years beginning in 2011. The available adoption credit and adoption assistance exclusion begins to phase out for taxpayers with modified adjusted gross income in excess of $182,520 and is completely phased out for taxpayers with modified adjusted gross income of $222,520 or more.

Rev. Proc. 2010-35 will be published in IRB 2010-42, dated October 18.

Guidance To Compute Credit, Substantiate Claims

Notice 2010-66 provides interim guidance and rules for computing and substantiating claims for the adoption credit for a taxable year beginning in 2010.

A taxpayer may claim qualified allowable expenses (QAE) paid or incurred for an unsuccessful domestic adoption. Expenses for an unsuccessful domestic adoption of an identified child are aggregated with the expenses of a successful adoption of another child in applying the dollar limitation, the IRS clarified.

For an adoption of a child with special needs, a taxpayer may claim up to the full amount of the dollar limitation, as determined by the state where the adoption occurs, in the year in which the adoption is final. The credit is subject to an income limitation based on the taxpayer’s modified adjusted gross income (MAGI). The income limitation applies to qualified adoption expenses in the first taxable year the taxpayer claims the credit for that qualified adoption expense.

Prior to the ACA amendment, the credit was not refundable. The old Sec. 23(c) allowed a taxpayer to carry forward the amount of the credit in excess of the taxpayer’s tax liability to five subsequent taxable years. The income limitation did not apply to an amount carried forward to a later taxable year.

Sec. 36C(f)(2)(B) authorizes the Treasury Department to require taxpayers to provide information substantiating claims for the adoption credit.

Interim Guidance

Amounts carried over from earlier taxable years to a taxable year beginning in 2010—are allowable as a refundable tax credit and are not subject to an income limitation in that taxable year. The IRS provides the following examples:

Example 1. In 2008, taxpayer pays $2,000 of qualified adoption expenses to adopt an eligible child who is a citizen of the United States. In 2009, taxpayer pays an additional $8,000 of QAE and the adoption becomes final. The adoption credit for $10,000 of QAE is allowable in 2009.

Taxpayer’s tax liability for taxable year 2009 is $6,000, and taxpayer applies $6,000 of the $10,000 credit against taxpayer’s 2009 tax liability. Taxpayer carries forward $4,000 of the credit to 2010.

In 2010, taxpayer’s tax liability is $3,000. Taxpayer applies $3,000 of the $4,000 carried forward adoption credit against taxpayer’s 2010 tax liability. Taxpayer is entitled to a refund of the remaining credit ($1,000).

Example 2. The facts are the same as in example 1, except that in 2010, taxpayer pays an additional $2,000 of QAE. Taxpayer’s income exceeds the upper income limitation for 2010.

Because of the income limitation, the adoption credit is not allowable for the $2,000 of QAE taxpayer pays in 2010. However, taxpayer may apply the $4,000 adoption credit carried forward to reduce taxpayer’s tax liability for 2010 and may receive a refund of any carried forward credit that exceeds taxpayer’s tax liability.

Substantiation Requirements

Beginning after Dec. 31, 2009, to the taxpayer’s income tax return for the taxable year that the taxpayer claims the credit, the taxpayer must attach the following documents, according to the applicable circumstances:

a. Domestic and foreign adoptions that have been finalized

(1) In the United States, an adoption order or decree.

(2) A foreign adoption governed by the Convention and finalized in another country:

A. A Hague Adoption Certificate (Immigrating Child),

B. An IH-3 visa, or

C. A foreign adoption decree, translated into English.

(3) For a foreign adoption from a country that is not party to the Hague

Convention:

A. A foreign adoption decree, translated into English, or

B. An IR-2 or IR-3 visa.

(3) For a foreign adoption from a country that is not party to the HagueConvention:

A. A foreign adoption decree, translated into English, or

B. An IR-2 or IR-3 visa.

b. Domestic adoptions that are not final

(1) An adoption taxpayer identification number, obtained by the taxpayer for the child, included on the taxpayer’s income tax return (instead of attaching a document);

(2) A home study completed by an authorized placement agency;

(3) A placement agreement with an authorized placement agency;

(4) A document signed by a hospital official authorizing the release of a newborn child from the hospital to the taxpayer for legal adoption;

(5) A court document ordering or approving the placement of a child with the taxpayer for legal adoption; or

(6) An original affidavit or notarized statement signed under penalties of perjury;from an adoption attorney, government official, or other person, stating that the signor:

A. Placed or is placing a child with the taxpayer for legal adoption, or

B. Is facilitating the adoption process for the taxpayer in an official capacity.

c. Adoptions of special needs children

In addition to the documentation required under paragraph 2.a. of this notice, a taxpayer claiming the adoption credit for a child with special needs must attach a copy of the state determination of special needs to the taxpayer’s income tax return for the taxable year that the taxpayer claims the adoption credit for a child with special needs.

d. Information to be included in documentation

An order or decree must include information that establishes that the taxpayer’s adoption of the eligible child has been finalized and the date finalized, and a special needs determination must include information that establishes that the state has made a determination of special needs for the eligible child. A taxpayer may redact sensitive personal information from an adoption order or decree or a special needs determination. However, the IRS may require the taxpayer to provide an unredacted copy of the document if needed to substantiate the claim for the credit.

This notice is effective for taxable years beginning after Dec. 31, 2009 and will be published in IRB 2010-42, dated October 18.

Foreign Adoptions

Rev. Proc 2010-31 provides safe harbors for taxpayers to determine when a foreign adoption governed by the Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption (Convention) and subject to the Intercountry Adoption Act of 2000 (P. L.106-279) is final for purposes of the adoption credit and the exclusion for employer reimbursements under Sec. 137.

The Convention adoptions procedures apply to nearly all countries, including China, Peru, Guatemala, and Eastern European countries from which adoptions have been popular in the past, became effective in the United States on April 1, 2008. Every child adopted from a Convention country receives a Hague Adoption Certificate or a Hague Custody Declaration issued by a U.S. consular officer after determining that the adoption (or grant of custody) has met the requirements of the Convention and the Intercountry Adoption Act.

Rev. Proc. 2010-31 also provides taxpayers with guidance on filing amended returns to claim the credit or exclusion for Convention adoptions that became final in 2008 or 2009. The credit is allowable for qualified adoption expenses in the taxable year when the adoption is final, not necessarily in the year when a taxpayer pays or incurs the qualified adoption expenses. Qualified adoption expenses incurred in one taxable year for an adoption that is finalized in the next taxable year are allowable in the taxable year when the adoption is finalized.

General information about foreign adoptions and the Convention can be accessed through the State Department’s website at http://www.adoption.state.gov.

Foreign adoption from a Convention country is treated as final as follows:

For adoptions finalized in another Convention country (the “sending country”), in the taxable year that either:

(1) The sending country enters a final decree of adoption, or

(2) The Secretary of State issues a certificate under Sec. 301(a) of the IAA (IHAC).

For adoptions finalized in the United States for an adoption of a child who has entered the United States for the purpose of adoption subject to Sec. 301(c) of the IAA (IHCC), in the taxable year that a state court enters a final decree of adoption.

This revenue procedure is effective Sept. 29, 2010. A taxpayer may file an amended return to claim the adoption credit for qualified adoption expenses paid in taxable year 2008 or 2009, for a Convention adoption that became final as specified in Rev. Proc. 2010-31 during the period beginning on April 1, 2008, and ending on Dec. 31, 2009.

Rev. Proc. 2010-31 will be published in IRB 2010-40, dated October 4.

For further information regarding these revenue procedures and notice, contact Marilyn E. Brookens, of the Office of Associate Chief Counsel (Income Tax & Accounting), at (202) 622-4920.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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