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Rev. date: 01/01/2011

Adoption Credit and Adoption Assistance Programs for 2010 and 2011

Tax Topic 607
For 2010 and 2011, you may be able to claim a refundable tax credit for qualified expenses paid to adopt an eligible child (including a child with special needs). For tax years prior to 2010, the adoption credit is not refundable. Apart from the credit, you may be able to exclude from your gross income amounts paid to you, or for you by your employer, for qualified adoption expenses under a qualified adoption assistance program. You can claim both the exclusion and the credit for expenses of adopting an eligible child. However, you cannot claim both a credit and exclusion for the same expenses.
For expenses paid prior to the year the adoption becomes final, the adoption credit is generally allowed for the year following the year of payment. For expenses paid in and after the year the adoption becomes final, the credit is allowed in the year of payment. If a taxpayer pays qualified expenses for an adoption in the current year and prior years and the adoption becomes final in the current year, the taxpayer may be eligible to claim the credit on the return for the current year for the expenses paid in the current year as well as for any expenses paid for that adoption in the prior years.
For both the credit and the exclusion, qualified expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses that are directly related to and the principal purpose of which is the legal adoption of an eligible child. An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself. You may not claim an adoption credit or exclusion for a child who is not a United States citizen or resident unless the adoption becomes final. In the case of an adoption of a special-needs child, you may be eligible for a certain amount of credit or exclusion regardless of actual expenses paid or incurred. A child has special-needs if all of the following conditions are met:
  1. The child is a United States citizen or resident;
  2. A state determines that the child cannot or should not be returned to his or her parent's home, and;
  3. A state determines that the child probably will not be adopted unless assistance is provided.
The credit and exclusion for qualified adoption expenses are each subject to a dollar limitation and an income limitation. The amount of your adoption credit or exclusion is limited to a specific dollar amount ($13,360 for tax year 2011) for each effort to adopt an eligible child. If you can claim both a credit and an exclusion, this dollar amount applies separately to each. For example, if in 2011 you paid $10,000 in qualified adoption expenses for a final adoption, and your employer paid $4,000 of additional qualified adoption expenses, you may be able to claim both a credit of up to $10,000 and an exclusion of up to $4,000 in employer-provided adoption assistance. The dollar limit for a particular year must be reduced by the amount of qualified expenses taken into account in previous years for the same adoption effort.
The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (MAGI). If your MAGI is below the beginning phase out amount ($185,210 for tax year 2011), the income limit will not affect your credit or exclusion. If your MAGI is more than the beginning phase out amount your credit or exclusion will be reduced. If your MAGI is above the maximum phase out amount ($225,210 for tax year 2011), your credit or exclusion will be eliminated.
Generally, if you are married, you must file a joint return to claim the adoption credit or exclusion. If your filing status is married filing separately, you can claim the credit or exclusion only if you meet special requirements.
To claim the credit or exclusion, complete Form 8839, Qualified Adoption Expenses, and attach the form to your Form 1040 or Form 1040-A. You must attach one or more adoption related documents (identified in the form instructions) with the completed Form 8839, and attach the Form 8839 to your Form 1040 or Form 1040-NR. The required documents vary depending on whether the adoption is foreign or domestic, whether it becomes final in the tax year, and whether it is for a special-needs child.