Federal Adoption Tax Credit

Financial Incentive for Adoptive Parents

The Federal Adoption Tax Credit is one of the best financial incentives for adoptive parents. This is a dollar-for-dollar reimbursement--eligible families subtract a maximum $10,390 per child for specific adoption-related expenses from the tax dollars they owe that year. For 2005 federal income tax returns, the maximum credit will increase to $10,630.

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What expenses are covered?

  • "Reasonable and necessary" adoption fees

  • Court costs

  • Attorney fees

  • Traveling expenses (including meals and lodging while away from home)

  • Other expenses directly related to the legal adoption of an eligible child

What expenses are not covered?

  • Expenses that violate state or federal law

  • Surrogate parent expenses

  • Adopting your spouse's child

  • Adoptions paid for with funds received from federal, state or local programs

  • Expenses allowed as deductions under any other federal income tax rule

  • Expenses paid or reimbursed by your employer, except for amounts paid under an adoption assistance program

Who is an "eligible child?"

  • This is the best part -- nearly all adopted children are eligible for the credit, whether they're healthy infants or special needs children adopted domestically or children adopted internationally.

  • Must be under 18 years old OR

  • Be physically or mentally incapable of caring for him/herself.

  • Must be a U.S. resident when the adoption is finalized.

  • A child with special needs if he/she is a U.S. citizen or resident and a state determines that the child can't or shouldn't be returned to his/her birth parents' home and probably won't be adopted unless assistance is provided.

What is the income limit on the adoption credit?

  • The income limit is based on your modified adjusted gross income. If your modified AGI is $155,860 or less, you're eligible for the full credit (that is, considering you spent at least $10,390 on your adoption).

  • Those earning between $155,861 and $195,859 are eligible for a reduced credit.

  • The credit is eliminated for those with a modified AGI of $195,860 or more.

How does it work?

Generally, you claim the credit for the year following the year in which you pay adoption expenses. There are exceptions to this, so check with your tax advisor for details.

The $10,390 maximum is the amount of qualifying expenses taken into account over all tax years. If you've been trying to adopt the same child for more than one year, your credit will be reduced by the amount of expenses taken into account in previous years for the same adoption effort.

If you're married, you must file a joint return to take the adoption credit. If your filing status is "married filing separately," you can take the credit only if you meet special requirements.

You may be able to claim both the federal adoption tax credit AND to exclude adoption expenses from your gross income under your employer's adoption assistance program. For example, you may be able to claim a credit of up to $10,390 and also exclude up to $10,390 from your income. You can't claim both the credit and the exclusion for the same expense, however.

Consult your tax preparer about your eligibility, and to learn whether your state also offers a tax credit or deduction for adoption.

When can I claim the credit?

  • If the eligible child is a U.S. citizen, you can take the credit even if the adoption is never finalized.

  • If the eligible child is not a U.S. citizen or resident, you can't take the credit unless the adoption becomes final.

What forms do I have to complete?

  • File form 8839, Qualified Adoption Expenses.

  • Report the credit on line 50 of Form 1040 or line 334 of Form 1040A.

  • Attach form 8839 to your 1040 or 1040A.

Make sure to keep accurate records of all adoption expenses you claim!

For more information, read IRS publication 968, Tax Benefits for Adoption, www.irs.gov/publications/p968/index.html

This article and several other articles about financing adoption are also available at www.laurachristianson.com.

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