As individuals and families throughout the country begin to prepare and file tax returns for 2011, tax experts seem to agree that same-sex couples with children may be ignoring a significant tax benefit — the federal adoption credit.

Specifically, married and unmarried taxpayers who “adopted” their partner’s child in order to establish a legally enforceable parent-child relationship may be eligible for the IRS adoption credit — up to $13,360 in the 2011 tax year.

Section 36C of the Internal Revenue Code authorizes an adoption credit for qualified adoption expenses paid by any taxpayer who adopts an eligible child.  “Qualified adoption expenses” include all reasonable and necessary adoption fees, including court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child.  However, expenses incurred by a taxpayer to adopt his or her “spouse’s” child do not count as a “qualified adoption expense” under the Code.

So why would I urge clients who adopted their same-sex partner or spouse’s child to claim the adoption tax credit?  The answer is that the federal Defense of Marriage Act (DOMA) currently prohibits the federal government from recognizing a marriage between two persons of the same sex.

So even if you live in a state that will recognize your marriage, the federal government will not.  And since the federal government refuses to recognize same-sex marriages, a taxpayer who adopts his or her same-sex partner’s child is fully eligible for the tax credit because he or she is not adopting the child of his or her “spouse”, as defined under federal law.

According to Santa Clara Law professor and tax law expert Patricia Cain:

DOMA has, in effect, written in an exception to Section 36C for stepparent adoptions when the spouses are of the same sex.

The adoption tax credit is intended to provide taxpayers with a refund of costs incurred – including legal fees – in order to adopt a child.  The credit is fully refundable, meaning that it reduces your tax liability dollar-for-dollar.  Taxpayers who spent more on their adoption than they owe in taxes will actually receive a check from the federal government.

Because the tax credit is so valuable, the IRS has carefully reviewed its own enforcement strategy to ensure that taxpayers were rightfully claiming the tax credit.   In a recent report by the Government Accountability Office, it appears that approximately 68% of the nearly 100,000 returns on which the taxpayer claimed the adoption credit were audited by mail.  Because tax enforcement officers are trained to deny the adoption credit for adoptions involving the child of a spouse, a same-sex couple may be required to provide additional information or documentation.

While some taxpayers will certainly be permitted to claim the credit, others may be singled out for denial or challenge.  Enforcement and understanding of the adoption credit, and its interaction with state laws and federal laws concerning the recognition of marriage, appears to be spotty even among IRS tax agents.

A recent New York Times article highlighted the experience of Beth Jennings and her partner Coleen Jennings, who were recently denied the federal adoption credit.  The article explains that:

If you or your partner receive any notices from the I.R.S. requiring more information during this coming tax season, send your response to the I.R.S. within the time period allotted. “Most taxpayers, after pushing back hard, have had the credit allowed,” Professor Cain added.

That is the result that Beth Jennings is hoping for. She said that her partner, Coleen Jennings, adopted her biological daughter, Hazel, in 2010, four months after she was born. A couple of months after filing her return, she received a letter from the I.R.S. stating that the adoption credit was under investigation.

After sending more documentation, her partner was denied the credit, a decision they are now appealing.  And when they called the I.R.S., Ms. Jennings said the agent seemed confused about the reason for the denial, even though they provided all the required paperwork and went as far as having their lawyer sign an affidavit. “There is probably a place in the flow chart for the guy answering the phone, and it probably stopped or didn’t include this scenario,” Ms. Jennings said, referring to instructions on how to assist same-sex couples.

The IRS provides an Adoption Credit Page with frequently asked questions and other helpful information and forms for taxpayers.  In order to take advantage of the federal adoption credit, a taxpayer must prepare and file IRS Form 8839, (IRS Form 8839 Instructions).

If you have not already done so, we strongly encourage our clients who recently adopted a partner’s child in the last few years to speak with a tax professional about the possibility of filing an IRS 8839 in order to take advantage of the federal adoption tax credit.  This includes married and unmarried same-sex couples who have filed for co-parent adoption after using alternative reproductive technology or collaborative reproduction in order to become pregnant.

We encourage our clients to keep a chart or diary of their adoption expenses as they go, as it can be difficult to remember and document all expenses later on.  Our office is happy to assist you or your tax preparer in documenting your adoption expenses, preparing a legal opinion as to the nature of the adoption, and in helping you deal with an inquiry or challenge by the IRS.  Our office in Boston specializes in reproductive law and adoption, not tax law, and we encourage you to check with your tax preparer concerning the availability of any deduction or  credit.

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