 Hello and welcome to the session in which we would look at the adoption expense tax credit. This topic is covered in your accounting courses, tax course, and the CPA exam. Now if you are studying for your CPA exam, I strongly suggest you check out my website forhatlectures.com. I do not replace your CPA review course, whether you are the Rebecca, Roger, Glyme, Wiley, or any other course. What I can be is a supplement, is a vitamin pill, is that extra help that's gonna add 10 to 15 points on your CPA exam. So here's my offer to you. Are you willing to try my system for a month to find out whether you can add 10 to 15 points on your CPA exam that's gonna jumpstart your career? If you think it's worth it, I would suggest you give it a chance. Also, if not for anything, check out my website to find out how well is University of the Wing on the CPA exam. I also have, in addition to CPA resources, I have resources for your accounting courses, tax audit, governmental, financial, managerial costs, as well as international and others. Please connect with me on LinkedIn, like this recording, and connect with me on Instagram and Facebook. Let's take a look at the adoption tax credit. So simply put, a taxpayer, if they adopted a child, they can deduct, they can get a credit, not the deduction, they can get a credit, a maximum of 14,300 per eligible child. Now, bear in mind, this amount changes from year to year. So you can claim this adoption credit as long as you paid up to that amount. Now, if you paid more, you are limited to 14,300 per one eligible child. Now, the couples must file jointly, they must have a joint return, and those expenses, they have to be eligible expenses. What are eligible expenses? Well, something like adoption fees for an adoption agency have to pay fees, and those fees are very expensive, court cost, attorney fees, and any other fees related or somehow related to the legal adoption of that eligible child. Now, what is an eligible child? Well, an eligible child, it's a child that's under the age of 18, and notice or not and or incapable of taking of hers, of himself or herself. But that child does not include the child of an individual spouse. Let's assume you, you got married to a person who already have a child. Well, you cannot say you adopted that child. That's that does not count. Okay. So qualified expenses also do not include any reimbursement under an employer program. So simply put, if you paid those expenses, the adoption fees, the court cost, then your employer gave you money to kind of reimburse you. Well, you cannot have it both ways. Get the money from your employer and claim the credit. And we'll talk about this topic a little bit at the end. You have to understand that adoption proceeding, they could spend over several years until it becomes final. So we have special rules on how when to take that adoption. So in the case the expenses paid in the years before the adoption becomes final, taxpayer take it, take the expense immediately after the year it's paid. So simply put, let's assume you made some payment in 2019, but the adoption was not finaled in 2020, then we have 2021. So let's assume you paid an amount here. If the adoption is not final for in that year, then you can take the, the, the expense in 2020. Now expenses paid in the year, the adoption is finalized or after. So once it's once the adoption is finalized in any years after, if you paid any expenses, then you can take the credit in that particular year. And remember the total per child is 14,300 subject to obviously changes from year to year by the IRS. So this is basically, this is for 2020, but it could, it could change. Let's take a look at an example. March and Homer legally adopted a child in 2020. They incurred and paid qualified expenses, 6,000 in 2019. Notice the year before and 4,000 in 2020, the year of the adoption and 5,000 in 2021, a total of $15,000. So what, how much can they deduct? So without any AGI limitation, Homer and March would be entitled to an, to an, to adoption credit of 10,000 in 2020. Why 10,000 in 2020? Because they paid 6,000 in 2019, which going to be taken in 2020, 4,000 in 2020 together is 10,000. And an additional, this is not 4,080. This should be 4,300 in 2021. So why 4,300? This is a mistake here because in total you are, you are eligible for 14,300. They already took 10,000 in 2020. What's left is 4,300 and they did incur 5,000. Now without the limitation, if there was no limitation, they could, they could have took 15,000 in total, but there is a limitation. Okay. So anything above 14,300, you might incur it. Some people pay a lot of money to, to finalize an adoption, but that's, you cannot use it for the tax credit. Now there are special rules. If the child is not a US citizen or residents of the United States under those circumstances, you cannot take the credit until the adoption is final or in later years. So the credit is allowed only in the year in which the adoption you have to wait becomes final or later year, later year of the expenses were paid or incurred or after, if you incurred any expenses, you can take them, but it has to be final. Now there are special rules for special needs child. So placed, if you are placed with an adoptive parent where the state agency financial help is needed. So the parents adopted a child and that child needs financial assistance from the state maybe due to a mental, a mental handicapped or a physical handicapped or some medical issue. Under those circumstances, it does not matter whether you paid 14,300 or more, 14,300 or more, you can get the full credit. So let's assume it only cost you $6,000. Well, it doesn't matter because basically you're helping the state. Therefore, they would allow you 14,300 because now you're taking care of a child that has a special needs. Therefore, the government want to encourage you to do so and help the state as well because you're alleviating some of that help from the state. Now, obviously, there's a phase out for the adoption tax credit, not everyone gets the credit and simply put the phase out. Once your AGI or it said modified AGI, don't worry about modified AGI for the CPA exam, just know that AGI modified means you might have to add or subtract certain income from your AGI. Once your AGI exceeds to 14,520, you will start to lose some of that credit. Then once it reaches 254,520 and you're above that, then you would lose the whole thing. So the phase out range is $40,000. So simply put, this is to 14,520 and this is 254,520, there's 40,000. So once you reach that amount, once you reach to 14,520, you will start into the phase out range, you will start to lose some of that credit. Once you go to 254,520 or above, that's it, you no longer qualify for the credit. Now, if you are in between, if you are within the range, here's what's going to happen, you're going to take 254,520, which is the upper range. And again, those numbers will change from year to year and deduct your modified AGI divided by the phase out range. So let's take a look at an example. Homer and Marsh spent $18,000 in qualified adoption expenses. Notice $18,000 is first of all more than $14,300. Their modified adjusted gross income is 220. Their modified adjusted gross income is higher than the, they went into the phase out range. How do they compute their adoption credit? You will take the upper limit minus modified adjusted gross income divided by 40,000. And you will take this ratio and you multiply it by 14,300. You don't multiply it by 18,000. So some students, what they do, they multiply it by the qualified, by the total adoption expense. No, you multiply it by the limit and that limit will change from year to year. And this upper limit might change from year to year. So you just have to know the formula. It's the upper limit minus AGI, if you are within the limit divided by 40,000. And this 40,000 could change, but for a long time, that phase out range is 40,000. And then you multiply it by the maximum credit. Therefore, they are eligible for 12,341, although they paid 18,000. So remember to multiply the fraction by 14,300. Now, if the taxpayer received any assistance from their employer, if the taxpayer received employer provided adoption benefit, like simply put money, the amount of qualified adoption expenses is limited to the amount that you paid in excess of your employer. So if you incurred 8,000 and your employer gave you 8,000, then you have really no adoption tax credit because you were reimbursed. If they gave you 8,000, you incurred 9,000, then you have a 1,000. Now, what happened if they gave you more than what you incurred? You incurred 8,000, but they gave you 10,000, then you have 2,000 of taxable income because they gave you more than what you needed. Let's take a look at a couple more examples to see how this all worked together. Homer and Marsh incurred the following expenses in the adoption of their infant daughter, which was finalized in 2020. They paid 10,500 in 2019 and they paid 3,950 in 2020. If their modified adjusted gross income is 120, how much they can claim in 2019? How about 2020? Well, for one thing we know from their AGI, their way below the threshold, so there's no reason for any phase out, how much can they claim in 2019? The 2019 zero because remember, it was not finalized. Their amount is moved to 2020. How much can they claim in 2020? Well, they can claim the maximum. What's the maximum? Well, remember, they actually incurred. Let's do the math so we'll see that how much they were incurred. They incurred 10,500 plus 3,950, which is 14,450. They can only claim 14,300. Therefore, the 150 they cannot use. So the maximum, so in 2020, 14,300, 2019, zero. Let's look at another scenario. Marsh and Homer spent 16,000 and it qualified adoption expenses in the adoption of their son. The adoption was finalized and all the expenses were incurred in the current year. Assuming their AGI is 236,000, how much can they take? Now remember here, their AGI is or their modified AGI, I'm just going to call it AGI. Notice that it exceeded the phase out range. Remember, the phase out range, let's go back to the phase out range. What's the phase out range? It starts at 214,520. 214,520 and we have to add 40,000 to that. So we're going to take 254,520, which is the upper limit minus 236, divide that amount by 40,000, then multiply the whole thing by 14,300 and that's going to give us 6,621. And this is their adoption tax credit, adoption tax credit. And let me just do the math just to make sure this all adds up. Let me just get the calculator here. So I'll show you the percentages as well, so this way you can see the percentages. So we're looking at 254,520 minus 236,000 toward the upper limit, divide this by 40,000 and that's going to give us a ratio of 0.46. We're going to multiply this ratio by 14,300 and that's 6,621 grounding. Now, if once again, if you are a CPA candidate or an accounting student, especially if you're a CPA candidate, I strongly suggest you check out my website for additional resources, especially that if you are finding difficulty or hard time with your CPA review course and you need that additional vitamin supplemental tool to pass the course. Good luck, study hard and stay safe.