What About Tax Credits?
You can claim a tax credit that covers some adoption expenses.
The exact year you can claim your expenses depends on several factors, including when the expenses were paid, when the adoption was finalized, and even whether your new son or daughter is a U.S. citizen or resident.
Court costs, adoption charges, attorney fees and travel expenses are some of the items covered by the credit. In domestic adoptions, you can claim your expenses even if the adoption is never completed.
Special rule for special needs cases
An adoption is considered a special needs case when the child is a U.S. citizen or resident when the process begins and the state has determined that the child should or cannot be returned to his or her family.
The governing jurisdiction also must rule that because of special factors, assistance is required to place the child with adoptive parents.
In these cases, the new parents are allowed to claim the maximum credit amount even if their actual expenses did not reach that amount. For example, your special needs adoption process was finalized in 2005. It took two years, over which time you spent $9,000.
On your 2005 return, you can claim an adoption credit of $10,630 even though your actual expenses fell $1,630 short.
Employer Assistance
In addition to the tax credit, adoptive parents who get financial help from their companies may be able to avoid paying tax on up to $10,630 of that employee benefit.
You may claim this income exclusion along with the tax credit for the same adoption, basically doubling your adoption tax break.
The only proviso: You cannot use both the exclusion amount and credit to write off the same expense. For example, if your company reimburses your adoption travel costs of $10,630, you cannot use these expenses as part of your credit filing. But all other eligible costs up to that amount may be counted toward the credit.
Other credit considerations
In most cases the child must be younger than 18. The age limit is waived if the child is physically or mentally challenged.
You cannot count expenses related to surrogate parents or the adoption of your spouse's child in figuring your allowable credit.
Married couples generally must file a joint return to take the adoption credit or exclusion. If you file as married filing separately, the credit is available only if you meet special requirements.
The credit amount is per child, not per year. So if the adoption of your son takes four years and costs $17,000, you will be able to claim only $10,630 of your expenses during that whole time. You can carry forward any unused credit amounts for the adoption for up to five years.
If the adoption is not completed, you still can claim the credit for your expenses in the unsuccessful adoption attempt.
The credit begins phasing out if your modified adjusted gross income exceeds $159,450. You can't claim the credit at all if you make more than $199,450. The same limits apply to either single adoptive parents or the total income of married couples filing jointly.