An Adoption Tax Credit is available for individual income tax equal to the first $5,000 of unreimbursed expenses related to an adoption per each child placed in Iowa. There is no limit on the amount of income earned by an individual to be eligible for the credit.
The Adoption Tax Credit can only be claimed once the adoption has been finalized. Only qualified adoption expenses paid or incurred during the tax year are eligible for the credit claimed in that tax year. If qualified adoption expenses were paid or incurred in an earlier year, a timely amended return can be filed for that earlier year claiming the Adoption Tax Credit. All claims for the adoption of a child cannot exceed the applicable limit based on the year the adoption became final.
A part-year resident of Iowa may claim the credit if he/she was a resident of Iowa at the time the child was permanently placed.
The IA 177 is used to compute the credit and must be included with the Iowa income tax return. The tax credit must also be reported on the IA 148 Tax Credit Schedule using tax credit code 66. If multiple children are adopted in a tax year, complete a separate IA 177 for each Adoption Tax Credit and report each claim on a separate line on the IA 148. Any tax credit in excess of tax liability is refundable.
Any adoption expenses applied to the Adoption Tax Credit are excluded from the calculation of the Iowa itemized deduction for adoption expenses taken on line 27 of the IA 1040 Schedule A. The itemized deduction equals the expenses in excess of three percent of adjusted gross income. For example, if a taxpayer has $100,000 of adjusted gross income and $10,000 of adoption expenses, the taxpayer can claim a $5,000 Adoption Tax Credit and $2,000 of itemized deductions for adoption expenses. See line 37 for an example of the adoption expenses deduction.