There are two primary types of adoption benefits in the U.S. Tax Code: a tax credit for qualified adoption expenses (Form 8839), and the exclusion of qualified employer-provided adoption assistance from some federal withholdings.
According to the IRS, qualified expenses for both benefits include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses that are directly related to the adoption.
Three types of adoptions make you eligible for the tax benefits, and the rules are slightly different for each:
- Children under age 18 adopted within the U.S.
- Children under age 18 adopted outside the U.S.
- Children of any age with special needs adopted in the U.S.
How the adoption tax credit works
For a brief two years—2010 and 2011—the adoption tax credit was refundable. Refundable tax credits can bring the amount of tax you owe to below zero. When the total of the credits is greater than the tax you owe, the IRS sends you the difference in the form of a refund.
But in 2013, the credit for tax year 2012—a maximum of $12,650 per child—is purely nonrefundable. With a nonrefundable tax credit, your savings cannot be used to increase your tax refund or give you a refund when you otherwise would not have received one.
You can use the tax credit until the limit of $12,650 per adopted child is reached, and/or until the child is adopted and all costs are paid, as follows:
The limit is based on the credit or employee benefit available in the year of adoption. Be sure to keep proof of all expenses, and read up on which expenses are allowable.
Treat the employer-paid benefits as follows:
When adopting foreign children, the adoption must be final in order for you to claim the expenses.
Tax benefits for adopting children with special needs
There is a unique tax benefit for the adoption of children with special needs. In the year the adoption is final, you may claim the full amount of the tax credit—even if you haven’t paid anything for the adoption—if all of the following conditions are met:
- The child was a U.S. citizen or resident when the adoption effort began.
- A state determines that the child cannot or should not be returned to his or her parent’s home.
- A state determines that the child probably will not be adopted unless assistance is provided to the adoptive family.
Circumstances that could make you ineligible for the tax credit
What children are not eligible for the credit? You cannot claim a tax credit or benefits for adopting family members (for example, nieces or nephews), nor can you receive the benefits if you marry and adopt your new spouse’s child or children.
If your income is too high, you are also not eligible to claim the adoption tax credits. For 2013, the income phase-out range is between $194,580 and $234,580.
If you were involved in an adoption in the last three years and didn’t claim these tax credits, you may want to consider amending the prior year’s tax return to get those refunds.
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.