Do you have to pay for failed adoption expenses before you can claim them on taxes, and when can you do that?

[mijesus1996]

I have an invoice from the lawyer for this year.  He said he was fine holding until we could claim the adoption credit since we didn't really expect to have this much expense in one year.

As I read about filing failed adoption attempts, it seems you have to have an adoption expense first, so my question is, do we need to go ahead and pay him now instead of waiting a couple years when trying to claim the credit?

Ideally I would love to wait until next year or year after and claim the credit and then use that money to pay the lawyer fee, but I'm not sure how that works.

And from what I've read, failed adoptions, you have to wait a year, so if we do pay this year in 2016.  We couldn't file in January 2017, but would instead have to wait until January 2018.  Is that right?  If so, that is a financial hardship for many trying to adopt so I want to make sure I understand this properly.

[bwa · Accepted solution]

Adoption expenses are deductible in the earlier of the year the adoption becomes final, or the year after they are paid.  For a failed adoption, that would be the year after they are paid.  Consequently, if you pay them in 2016 they would be eligible for credit in 2017 (which, at the earliest, you would claim on your 2017 return filed in January 2018..

(An exception is for a foreign adoption, where for a failed adoption, they are not eligible for a credit at any time.)

[mijesus1996]

Thanks, there seems to be confusion around adoption expense.  For example, if my lawyer is content waiting until I can claim the credit when I file in Jan 2018, is it sufficient that I have an "expense/invoice" that is unpaid as documentation for taxes?  I think it is, but can someone help me find this in the tax code/worksheets for the adoption credit so I understand this better?  I'm trying to figure out if I "have" to pay the invoice here in 2016, or can I just wait and pay it in 2018 as I claim the credit?

[bwa]

Sorry, but year paid means year paid.  Having an unpaid invoice doesn't count as paid.  Look at Sec. 23(a)(1) and (a)(2)  of the statute:  <a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/23">https://www.law.cornell.edu/uscode/text/26/23</a>

[mijesus1996]

Thanks!  This says paid or incurred though.  Wouldn't incurred cover an invoice where you have an incurred expense, but haven't necessarily paid?  An incurred expense is a cost that a person or business owes when receiving goods or services. In business, the phrase "incurred expenses" typically refers to costs incurred that have not been paid.

[bwa]

I believe that language applies in the unlikely event of an accrual basis taxpayer.  The IRS, in Tax Topic 607 describes it as follows:

"A domestic adoption is the adoption of a U.S. child (an eligible child who is a citizen or resident of the U.S. or its possessions before the adoption effort begins). Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment (even if the adoption is never finalized and even if an eligible child was never identified). "  Note there is no reference to accrued or incurred.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc607.html">https://www.irs.gov/taxtopics/tc607.html</a> .  Tax Topic 607 leaves out any reference to incurred.

[mijesus1996]

Thanks, this gets a little complicated.  Maybe I will give the IRS or an accountant a call to be safe.  I appreciate your help and pointing me to these references.