Tax Help - The Tax Advantages of Adoption

You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child.

First, check with your employer about assistance, because some companies offer a program to get back a portion of adoption expenses. The Adoption Credit is not available for any reimbursed expense, but certain amounts reimbursed by your employer for qualifying adoption expenses may be excluded from your gross income.

How does it work?

The Adoption Credit could reduce your tax liability by as much as $11,390 for any type of adoption. You may claim both a credit and an exclusion for the expenses of adopting an eligible child. In other words, you may be able to claim a credit of up to $11,390 and also exclude up to $11,390 from your income. However, you can't claim both a credit and an exclusion for the same expense.

To qualify for the full credit:

• Your adjusted gross income must be less than $170,820.
• The Adoption Credit or exclusion must be taken for a child who is a U.S. citizen or resident, unless the adoption of a foreign non-resident child becomes final.
• You must adopt an eligible child.

Or

• The child must have special needs.
• The child must be a U.S. citizen or resident.
• A state has determined that the child can't or shouldn't be returned to their parents' home and probably won't be adopted unless assistance is provided.

The credit and exclusion are reduced if your modified adjusted gross income is between $170,820 and $210,820. You can't claim either the credit or the exclusion if your modified adjusted gross income is $210,820 or more.

If you're adopting a special needs child, you can claim the full credit regardless of the amount spent on adoption expenses.

Is my child eligible?

An eligible child is one who is either younger than 18 or physically or mentally incapable of self care. A special needs child must have been a U.S. citizen or resident at the time the adoption procedure began, a state must have determined that the child shouldn't be returned to his or her parents' home, and the state must have determined that the child will not be adopted without assistance from the state. States make this determination based on a variety of factors that include:

• the child's ethnic background
• the child's age
• the child's minority status
• whether the child has siblings
• whether the child has a chronic medical condition
• whether the child has an emotional or physical handicap

Which adoption expenses qualify?

Adoption expenses covered by the credit include:

• all adoption fees
• court costs
• attorney fees
• travel expenses (including meals and lodging while away from home)
• other expenses directly related to the legal adoption of an eligible child

What expenses don't qualify?

There are several adoption-related expenses that are not eligible for the credit. Some of these include:

• expenses that violate state or federal law
• expenses associated with surrogate parenting arrangements
• expenses associated with the adoption of your spouse's child
• expenses paid with funds received from any government program
• expenses allowed as a credit or deduction under any other federal income tax provision
• expenses paid or reimbursed by an employer or someone else

When do I claim this credit?

If you're adopting a U.S. child, you claim the tax credit in the year after you incur the expense or the year the adoption becomes final, whichever comes first. For example, if you pay for a home study in 2006 but your adoption isn't finalized until 2007, you claim the Adoption Credit in 2007. The credit for expenses you pay in a year after the adoption is final is claimed in the year the expenses were paid.

In the case of a U.S. child, you can claim the credit even if your adoption of the child fails. However, if your adoption involves a foreign child, you can take the credit only if the adoption is completed.

You may claim the credit for more than 1 year. For example, assume you spent $500 in 2005 for a home study to adopt a U.S. child, then an additional $3,000 in court costs and adoption agency fees in 2006. If the adoption wasn't finalized until 2007, you would claim a $500 credit in 2006 and a $3,000 Adoption Credit in 2007. If the adoption became final in 2006, you would have taken the entire $3,500 credit in 2006. But again, for foreign children, no credit may be taken until, and only if, the adoption is finalized