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 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
|For adoption expenses you pay in||Take the credit in|
|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 2016. It took two years, over which time you spent $10,000.
On your 2016 return, you can claim an adoption credit of $13,460 even though your actual expenses fell $3,460 short.
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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 $13,460 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 $13,460 of your expenses during that whole time.
And if you claimed adoption expenses for the same child in prior tax years, it will affect this year's claim. For example, if you claimed a $3,000 credit in connection with a domestic adoption in 2015 and paid an additional $13,460 of qualified adoption expenses in 2016 when the adoption became final, the maximum credit you can claim on your 2016 return is $10,460 -- the $13,460 dollar limit less the $3,000 in qualified adoption expenses you already claimed.
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Even if the adoption of a U.S. child is not completed, you still can claim the credit for your expenses in the unsuccessful adoption attempt. Remember, however, if you are adopting a child from another country, the credit is only allowed when the adoption is finalized.
The credit begins phasing out if your modified adjusted gross income exceeds $201,920.
You can't claim the credit at all if you make more than $241,920. 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 $13,460 limit), on Form 8839, Qualified Adoption Expenses.