You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child (including a child with special needs). The adoption tax credit is an amount subtracted from your tax liability. Although it's generally allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in the current year for an adoption which became final in that same year may be eligible to claim the credit on the current year return.
The adoption credit is not available for any reimbursed expense. In addition to the credit, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.
Sound confusing? It can be. The following information will help you make sense of the adoption tax credit and determine your eligibility.
Adoption Tax Credit: The Basics
For both the credit or the exclusion, qualifying expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child.
An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself. The adoption credit or exclusion cannot be taken for a child who is not a U.S. citizen or legal permanent resident unless the adoption becomes final. An eligible child is also a child with special needs if they're a U.S. citizen or legal resident and a state determines that the child can't or shouldn't be returned to their parent's home and probably won't be adopted unless assistance is provided.
Under certain circumstances, the amount of your qualified adoption expenses may be increased if you adopted an eligible child with special needs.
Credits and Exclusions for Qualifying Adoption Expenses
Under the dollar limit, the amount of your adoption credit or exclusion is limited to the dollar limit for that year for each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar amount applies separately to each.
For example, if we assume the dollar limit for the year is $10,000 and you paid $9,000 in qualifying adoption expenses for a final adoption, while your employer paid $4,000 of additional qualifying adoption expenses, you may be able to claim a credit of up to $9,000 and also exclude up to $4,000 (IRS Tax Topic 607: Adoption Credit).
The dollar limit for a particular year must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort.
The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. If your modified AGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. If your modified AGI is above the maximum phase out amount for the year, your credit or exclusion will be eliminated.
Generally, if you're married, you must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements.
Adoption Tax Credit: Filing Procedure at a Glance
To take the credit or exclusion, complete Form 8839 (PDF), Qualified Adoption Expenses. You will attach Form 8839 to Form 1040 (PDF) or Form 1040A (PDF) and report the credit on line 53 of Form 1040 or line 34 of Form 1040A.
Get Professional Legal Help With the Adoption Tax Credit
The adoption process can be quite complicated, but it doesn't end when the adoption is finalized. If you're having trouble determining your eligibility for the tax credit or need legal help with any other adoption-related matter, you may benefit from legal counsel. Find an experienced adoption law attorney near you today.