Accounting for employer assistance

In addition to the tax credit, adoptive parents who get financial help from their companies may be able to avoid paying tax on up to $13,170 of that employee benefit.

The income exclusion, meaning you won't owe tax on the employer-provided adoption benefits, will apply to the tax year your boss provides them. The amount should be shown in box 12 of your W-2 and noted with the letter code T.

You may claim this income exclusion along with the tax credit for the same adoption, basically doubling your adoption tax break.

The only limitation: You cannot use the exclusion amount and credit to write off the same expense. For example, if your company reimburses your adoption travel costs of $8,000, you cannot use these expenses as part of your credit filing. But all other eligible costs up to the full credit amount may be counted.

Other credit considerations

While you can adopt a U.S.- or foreign-born child, in most cases, the youngster must be younger than 18. The age limit is waived if the child is physically or mentally challenged.

You cannot count expenses related to surrogate parents or the adoption of your spouse's child in figuring your allowable credit.

Married couples generally must file a joint return to take the adoption credit or exclusion. If you file as married filing separately, the credit is available only if you meet special requirements.

The credit amount is per child, not per year. So if the adoption of your son or daughter takes four years and costs $17,000, you will be able to claim only $13,170 of your expenses during that whole time.

You can carry forward any unused credit amounts for the adoption for up to five years. Now that the adoption credit is refundable, adoption credit carryforwards from 2005 through 2009 also are refundable on your 2010 taxes.

If the adoption is not completed, you still can claim the credit for your expenses in the unsuccessful adoption attempt.

The credit begins phasing out if your modified adjusted gross income exceeds $182,520. You can't claim the credit at all if you make more than $222,520. The same limits apply to either single adoptive parents or the total income of married couples filing jointly.

Claim your adoption expenses, as well as any adoption-related benefits you received from your employer and can exclude from your income (also up to the $13,170 limit), on Form 8839, Qualified Adoption Expenses. Also, the adoption credit can no longer be claimed on the slightly shorter Form 1040A. You now must attach Form 8839 to the long Form 1040.

Finally, note that the adoption tax break is scheduled to return to much lower credit and exclusion levels ($5,000 for most adoptions or $6,000 for a special needs child) in 2012, unless Congress moves to continue them in the current form.

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