But there is tax help available. Parents can claim a tax credit that covers some adoption expenses. For 2010 returns, the credit could be as much as $13,170.
And for the 2010 and 2011 tax years, a provision in the health care reform act makes the adoption tax credit refundable. That means if you don't owe the Internal Revenue Service anything when you file, the credit will be returned to you as a refund.
To get that credit, however, you need to keep close track of the adoption process. 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.
You also must file a paper tax return. The IRS isn't accepting e-filed returns where the adoption tax credit is claimed, because the agency requires filers to attach documents supporting the adoption. You can still use computer software, including the IRS' Free File program, to prepare your tax return and adoption claim, but you must print out the forms and mail them, and the adoption documentation, to the IRS.
Acceptable adoption documents
- The final adoption decree.
- A placement agreement from an authorized agency.
- Court documents.
- A state's determination for special needs children.
Domestic vs. foreign adoptions
If the child you adopt is U.S.-born or a resident, there are IRS guidelines on when you can take the credit.
Court costs, adoption charges, attorney fees and travel expenses are some of the items covered by the credit.
The rules for a foreign adoption are slightly different. In these cases, any costs you incur cannot be taken until the year the adoption is final. Once your adoption of a foreign-born child is completed, any expenses you pay after that can be claimed the year they are paid. With domestic adoptions, you can claim your expenses even if the adoption never is completed.
The final adoption date -- and availability of the tax credit -- in cases involving children who were not born in the United States depends on when the foreign-born child receives an "immediate relative," or IR, visa from the Department of State. Since there are various types of IR visas, check out Internal Revenue Announcement 2005-45 for details that could affect your particular circumstances.
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 or District of Columbia has determined that the youngster should not 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.
When to claim the tax credit for a child who is a U.S. citizen or resident
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| Any year before the year the adoption becomes final. | The year after the year of the payment. |
| The year the adoption becomes final. | The year the adoption becomes final. |
| Any year after the year the adoption becomes final. | The year of the payment. |
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 2010. It took two years, over which time you spent $10,000.
On your 2010 return, you can claim an adoption credit of $13,170 even though your actual expenses fell $3,170 short.