The Adoption Credit is available for the amount of out-of pocket qualified adoption expenses, or to exclude employer-provided adoption benefits from income. The maximum credit for 2010 is $13,170. For adoptions finalized in 2010 or 2011, the credit is refundable, as is unused credit carried forward from prior years, even though the credit was nonrefundable in prior years.
Requirements to Claim Credit
- The qualifying child must be under age 18, or is physically or mentally incapable of self-care.
- You can claim the credit for any filing status, but if married filing separately, the following must be true:
- You lived apart from your spouse during the last 6 months of the year.
- The eligible child lived in your home for more than half of the current tax year.
- You paid over half the cost of keeping your home.
- You meet all other requirements.
- Your 2010 modified adjusted gross income (MAGI) must be less than $222,180. The same income limit applies to single and joint filers. See below for additional phase-out amounts.
- You are able to report the eligible child's name, year of birth and identifying number.
- You meet at least one of these conditions:
- The adoption expenses were paid in the prior tax year, but the adoption was not final that year.
- The adoption expenses were paid in the current tax year and the adoption was final in or before the current tax year.
- The adoption of a special needs child was final in the current tax year.
- The adoption expenses were paid after 1996 and the child is a foreign eligible child whose adoption became final in the current tax year.
- You carried unused Adoption Credit forward from a prior year. Note that credit carried forward is treated as refundable, even though the credit was nonrefundable in prior years.
- You must provide documents substantiating the adoption. Depending on the type of adoption, acceptable documents include an adoption order or decree, an adoption certificate, or the child's visa for entering the United States (for a foreign adoption). For domestic adoptions that are not final, or for adoptions of a special-needs child, different documents apply. See IRS Notice 2010-66 for more information.
Qualified adoption expenses include expenses that are reasonable and necessary in order to adopt the eligible child:
- Adoption fees
- Court costs
- Attorney fees
- Travel expenses while away from home
- Re-adoption expenses related to adoption of a foreign child
For the adoption of a special-needs child, the maximum credit is available, regardless of actual qualifying expenses.
Timing of Expenses and Credit
Most taxpayers claim the credit in the year their adoption is final. There are some allowable exceptions and requirements:
- For a domestic adoption, you may claim the credit for in a tax year before the adoption is final, but must wait to claim the credit until the next tax year.
- You may not claim the credit for a foreign adoptions until the year the adoption is final. Expenses from previous years are treated as paid or incurred in the year the adoption is final.
- For both domestic and foreign adoptions, you can claim the credit against expenses incurred in years after the adoption is final. The credit is allowable for the tax year you incurred or paid the qualifying expenses.
- Expenses for an unsuccessful domestic adoption may be included with expenses for a successful later adoption, possibly increasing the credit.
- Expenses in connection with surrogate parenting
- Expenses incurred to adopt the child of the taxpayer's spouse
- Expenses reimbursed by your employer or other organization
- Expenses violating federal or state law
- Any child under age 18. If the child turned 18 during the year, the child is considered eligible for the part of year they were under age 18.
- Any physically or mentally disabled person unable to self-care.
Employer Provided Benefits
If your employer provides an adoption assistance program you may be able to exclude from income the expenses paid on your behalf.
The expenses must be paid directly to you or a third party for qualified adoption expenses. Employer-provided adoption benefits may reduce your salary and are generally reported in Box 12 of your W2.
The amount of the Adoption Credit begins to phase out when your 2010 modified adjusted gross income (MAGI) reaches $182,520, and is eliminated at $222,520. The same limits apply to all filers.
- The maximum amount of credit is $13,170.
- The credit may be carried forward for up to 5 years or until all of the credit has been used, whichever comes first.
- Carryforward credits are not subject to MAGI limitations.
To take the credit or exclusion, complete Form 8839 and attach the form to your Form 1040 or Form 1040A.