Adoption Credits and Exclusions

You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child, including a child with special needs.

What adoption expenses qualify to be claimed on your tax return?

Some qualified expenses include:

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

The adoption credit is an amount subtracted from your tax liability. Credits are generally allowed the year following the year of expense payment and adoption completion. A taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit for the expenses on the current years return. Certain amounts if paid by your employer for qualifying adoption expenses, may be excludable from your total gross income.

Your adoption credit or exclusion is limited to the allowable dollar limit for the year of each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar amount applies separately to each..

Eligible children must be under 18 years old, or be physically or mentally incapable of caring for themselves. The taxpayer may also be eligible to take an increased credit or exclusion for expenses related to the adoption of a child with special needs if:

• the child otherwise meets the definition of qualifying child
• is a United States citizen or resident
• the state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided.

The credits and exclusions for qualifying adoption expenses are each subject to a dollar and income limit.

The dollar limit for a particular year is reduced by the amount of qualifying expenses in previous years for the same adoption effort.

Income limit on the adoption credit or exclusion is based on modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, it will not affect your credit or exclusion. If your modified AGI is above the beginning phase out amount for the year, your credit or exclusion will be reduced. If your modified AGI is more than the maximum phase out amount for the year, your credit or exclusion will be eliminated.

In general, if you are 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.

Expenses that don't qualify and violate state or federal law:

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

Child eligibility requirements?

• The adopted child must be a U.S. citizen or resident at the time the adoption, or a finalized adoption of a foreign or non-resident child.
• The child must be younger than 18, or have special needs and be physically or mentally incapable of self care.
• The 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. States make this determination based on a variety of factors some of which include:
  • ethnic background
  • the child's age
  • the child's minority status
  • whether the child has siblings
  • if the child has a chronic medical condition
  • if the child has an emotional or physical handicap