Adoption Credit: Deducting the Costs of Bringing Home Baby
This chapter is a free excerpt from Ask the TaxGirl: Everything Parents Should Know About Filing Taxes (Including Child Care Expenses, Medical Costs, and the Earned Income Tax Credit.
But happiness comes at a price: adoption is not cheap. The average cost of a private adoption is $30,000 with foreign adoptions topping nearly $50,000.
Fortunately, there's a credit to help offset qualified adoption expenses. Qualified adoption expenses are defined by the IRS as "reasonable and necessary adoption fees." That means expenses like court costs, attorney fees, traveling expenses and other expenses directly related to the legal adoption of an eligible child. Keep excellent receipts (you'll need them) including entry visas for foreign adoptions, final decree, certificate or order of adoption, home study by an authorized placement agency, child placement agreements or court orders, and determination of any special needs status.
Qualified adoption expenses do not include expenses for adopting your spouse’s child, for a surrogate parenting arrangement, that violate state or federal law (yes, this includes adopting your girlfriend or significant other for tax, inheritance or other reasons) or those paid using funds that weren't out of your pocket (those received from a federal, state, or local program or paid or reimbursed by your employer or any other organization).
For purposes of the credit, an eligible child is a child under the age of 18 or an individual who is physically or mentally incapable of caring for him or herself.
Under the Affordable Care Act (the new health care law), the adoption credit was made refundable for 2010 and 2011. That means that you can claim the full amount of the credit for which you're entitled even if you have no tax liability. That changes a bit for 2012: the credit is not refundable. It remains bumped up, however: you may claim an adoption credit of up to $12,650 (for tax year 2012) per eligible child. The credit is slated to decrease to $5,000 (or $6,000 for a special needs child) in 2013.
To claim the credit, attach federal form 8839 (downloads as a pdf) and the required adoption-related documentation to your federal tax return. And all that clamor from the IRS about how they really, really want you to file electronically? Not so with the adoption credit: you must file a paper tax return because you need to attach the supporting documents.
Adopting in the United States
If you pay qualifying expenses to adopt a U.S. child and you pay qualifying expenses in a year before the year the adoption is final, you must claim the credit in the year after the year that you make payment (note that this is different for foreign adoptions—check the next section for details). If you pay qualifying expenses in the year that the adoption is final, you claim the credit that same year. And if you make payment in any year after the year the adoption is final, you claim the credit in the year that you make the payment.
If your employer provides adoption assistance, you exclude that assistance from your income in the year of the payment.
Be sure to check the section on failed domestic adoptions for more information.
Adopting from abroad
If you pay qualifying expenses to adopt a foreign child and you pay qualifying expenses in a year before the year the adoption is final or in the year the adoption is final, you must claim the credit in the year the adoption is final. If you pay qualifying expenses in any year after the year the adoption is final, you claim the credit in the year that you make the payment.
If your employer provides adoption assistance, the same rules apply for determining when to exclude that assistance from your income (note that this is different from the rules for employer-provided assistance for domestic adoptions).
Be sure to check the next section for information related to failed foreign adoptions.
When the adoption falls through
Sadly, everything doesn’t always go as planned. Even if you don’t come home with a child, efforts to adopt still result in expenses. What then?
Failed Adoption Expenses
Hi Kelly, Can failed adoption expenses still be deducted even tho the adoption did not go thru?? Thanks.
There’s a “yes” and a “no” depending on your circumstances (see comments below). That said, if you paid qualifying expenses for an adoption in the previous tax year for an adoption which became final in the tax current year, you may be able to claim all of your qualifying expenses in one tax year. In that case, some of the expenses that were related to a failed adoption (for example, certain legal or agency fees) may qualify as “directly related” to the final adoption of an eligible child. If you’re not sure whether any such expenses from a prior attempt would qualify, ask your tax advisor. The adoption credit for 2012 is $12,650 per child and it is non-refundable. The amount is slated to be reduced to $5,000 in 2013.
Can you tell I’ve been through the adoption process? This is a bit of a pet issue for me.
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