How to Claim the Adoption Tax Credit

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Did you adopt a child in 2011?  If so, you know how expensive and time consuming the entire adoption process can be.  However, to offset some of the costs, you are eligible for the adoption tax credit, which was to be phased out in 2010 but has now been expanded and extended thanks to the Affordable Care Act.

How to Claim the Adoption Credit

To claim the adoption tax credit, you must file your taxes in paper form and use IRS form 8839, Qualified Adoption Expenses; you cannot file electronically.  Couples who make over $185,520 (to be increased for inflation in 2011), may only qualify for a partial adoption tax credit, and couples making over $222,520 do not qualify.

In general, tax returns that are filed correctly and are accompanied by the supporting adoption related paperwork will be processed in approximately three weeks.  However, the adoption credit is the largest credit available, so the IRS does monitor and sometimes contact filers to verify that all information is valid and correct, which can delay your return.

How Much Is the Credit?

The expanded tax credit can be as high as $13,170.  Qualifying expenses include adoption fees, court costs, attorney fees and travel expenses.  If you adopt a special needs child, you may qualify for the entire amount of the credit even if you, yourself, paid little out of pocket.  In addition, this credit is refundable; even if you paid little to no tax the year you file for the credit, you may be eligible for the entire credit amount.  In prior years, if you claimed the credit and the credit helped reduce your tax liability to zero, you were not eligible to get a refund for the remaining balance of the credit; it simply rolled to next year’s return.  However, you can now get a refund for the remaining amount after your tax liability reaches zero.

Rules Vary for Domestic and International Adoptions

There are differing rules regarding when you can claim your credit based on whether the adoption is domestic or international.  If you attempt to adopt a child from the U.S. but the adoption is not finalized and ultimately does not happen, you may still be able to claim your related expenses.  If a foreign adoption is not finalized, you cannot claim the expenses.

If you are pursuing a domestic adoption, you can claim expenses paid during the adoption process the year after the payments were made, even if the adoption has not been finalized.  However, for a foreign adoption, you cannot claim any fees until the year the adoption is finalized. One of our co-workers couldn’t have children so she went through the San Antonio adoption agency to get their family started with kids.

The adoption process can easily run upwards of $20,000 or more.  Without the adoption tax credit, many families that would like to give a child a loving home would be unable to.  However, because the tax credit is the largest one available, the IRS processes claims carefully.  Take advantage of the tax credit if you can, but make sure to follow the proper procedure and include all necessary documents so your tax return is not held up for further investigation.