96-071
Response
May 31, 1996
Request
TO: XXXXX
FROM:
XXXXX
DATE:
April 11, 1996
RE: Advisory Opinion on Adoption Deduction
In light of recent legislation that
repeals the limitation on the amount of adoption expenses that may be claimed
as a deduction from income, we have many questions on the parameters of the
deduction. These questions are as follows. Please consider this a request for
an advisory opinion.
1. Are adoption expenses eligible
for the deduction when the adoptions falls through? Foreign adoptions can run
into the thousands of dollars, and foreign governments may be capricious in
terminating the adoption when significant amounts of dollars have been spent in
good faith.
2. If adoption expenses straddle tax
years, may those expenses be claimed in both tax years? Or must all expenses be
claimed in the year of actual adoption, with the potential of requiring parents
to amend returns?
3. May expenses incurred by the
birth mother in putting the child up for adoption be deducted?
4. May expenses incurred by
middlemen in putting the adoption together be deducted?
5. Is travel a valid cost (foreign,
or, any travel)? If prospective parents must travel to other countries or
states, are hotel costs valid?
6. What, if any, foster care costs
are valid if the child is later adopted by the foster couple? If any costs are
valid, could the adoptive parents amend all years still open on the statute of
limitations?
XXXXX
Administrative
Officer
Utah
State Tax Commission
Re: Advisory opinion regarding adoption expenses
Dear
XXXXX
We have reviewed your request for an
internal advisory opinion as to the application of the income tax deduction for
adoption expenses. We find as follows:
It is the policy of this state to
encourage adoption as a means of finding suitable homes for children who are in
need of them and to relieve the public of the expense and responsibility for
their welfare. See, e.g., Wilson v.
Family Services, 554 P.2d 227 (Utah 1976). To that end, the legislature has
adopted provisions to benefit both the birth mother and the adoptive
parents.
Under section 62A-9-138 of the Utah
Code (as amended by S.B. 120), the birth mother may be eligible for public
assistance or to reimbursement by the adoptive parents for the “costs of
prenatal care, childbirth, neonatal care, and other expenses related to the pregnancy.” With regard to the adoptive parents, if the
birth mother accepts public assistance related to the birth and adoption, the
adoptive parents must reimburse the state in an amount determined by the Office
of Family Support. §62A-9-138 Utah Code
Ann. However, the adoptive parents may
also be entitled to reimbursement of certain medical expenses by their insurer
under the provisions of S.B. 194.
Additionally, the adoptive parents are entitled to an income tax
deduction for adoption expenses related to the mother’s actual medical and
hospital expenses that are related to the child’s birth, amounts paid to any
welfare agency or child placement service, legal fees associated with the
adoption, and for fees or costs of adoption.
§59-10-114 (2) (c) Utah Code Ann.
As evidence of the legislature’s increased commitment to providing tax
relief for adoption expenses, the legislature eliminated the caps on the tax
deduction. See S.B. 102.
The burden of child birth and
adoption expenses may fall upon the mother (or her guardian or some other
interested person), the adoptive parents, the public assistance program, or an
insurance company. The income tax
deduction in section 59-10-114 is intended to mitigate the actual and
reasonable expenses associated with the pregnancy, birth and adoption paid by
the birth mother (her legal guardian or another party acting on her behalf) or
the adoptive parents to the extent that the costs are not reimbursed by an
insurance company, public welfare agency or private charitable
organization. The costs which may be
claimed include:
(a) medical expenses associated with
prenatal care, childbirth, and neonatal care;
(b) fees paid to reimburse the state under
section 62-A-9-38 (6) (b) of the Utah Code;
(c) fees paid to an attorney or placement
service for arranging the adoption;
(d) all actual and reasonable travel costs
incurred exclusively for the purpose of completing adoption arrangements; and
(e) living expenses of the birth mother if
paid by the adoptive parents as part of their adoption expenses and if in
conformance with section 76-7-203 of the Utah Code.
Keeping in mind that the purpose of
this deduction is to encourage adoption, we anticipate that questions may arise
if the adoption process is abandoned prior to finalization or custody battles
erupt after adoption. As to those
issues, we interpret operation of the deduction as follows:
1. If the birth mother, her guardian or
any other person incurs unreimbursed expenses associated with the pregnancy or
placement for adoption, but the adoption process is terminated by the birth
mother for any reason prior to its completion, the party incurring the expenses
is entitled to the deduction.
2. If the adoption process is terminated
for any reason prior to its completion by the adoptive parents, the adoptive
parents may claim the deduction.
3. Unreimbursed adoption expenses for
foreign adoptions are deductible even if the adoption is blocked and terminated
by the foreign country prior to finalization of the adoption
4. If the birth mother sues for custody
after the adoption is finalized, the adoptive parents are entitled to deduct
expenses associated with the adoption, but not the legal expenses arising from
legal custody actions thereafter. We interpret
the deduction to apply to expenses incurred up to the time that the adoption is
ordered by the court. Neither the
statute nor the fiscal note that accompanied it anticipate after-adoption
expenses.
The deduction does not apply to
food, clothing or other routine expenses associated with the child’s care
(other than necessary medical expenses) that arise before the adoption is
final. For instance, the adoptive
parents may not deduct a portion of their family housing or household expenses
on the basis of providing a home for the child before the adoption is final.
The deduction must be claimed in the
tax year that the adoption expenses are incurred. If any amount claimed is reimbursed in a subsequent tax year,
that amount must be added to the amount of gross income for the tax year in
which reimbursement is received. Our
tax forms should be redesigned to allow for this adjustment.
Finally, when a foster care provider
applies to adopt a foster child in his or her care, the unreimbursed foster
care expenses incurred prior to the application for adoption are not adoption
expenses. The foster parent is entitled
to deduct only the actual unreimbursed adoption expenses as described in this
opinion. If the foster parent withdraws
the adoption application prior to finalization of the adoption, the procedures
outlined for cancellation of the adoption process by the adoptive parents shall
apply.
The interpretation set out in this
opinion should be the subject of an administrative rule. Please draft the rule and put it through the
administrative rulemaking process.
For
the Commission,
Alice
Shearer,
Commissioner