If you adopted or attempted to adopt a child in 2015, you may qualify for a tax credit up to $13,400 for each child legally adopted. The credit is nonrefundable, which means it’s limited to your tax liability for the year. However, any credit in excess of your tax may be carried forward for up to five years or until fully used up, whichever comes first.
If your employer reimbursed you for part of the costs of the adoption through a written qualified adoption assistance program, your income taxes would be reduced by the amount paid by your employer for any qualifying amount. The remaining amount may be taken as a credit, provided it qualifies. You may be able to claim both the tax credit and the exclusion, but not for the same expenses.
Eligible Child. An eligible child is an individual who is under the age of 18, or is physically or mentally incapable of self-care. However, adopting the child of your spouse does not qualify,
Special Needs Child. If you adopted an eligible U.S. special needs child and the adoption is final, you may be able to take the maximum tax credit even if you paid less or even paid no expenses at all. Each state defines special needs, but it usually means a child who shouldn’t be returned to the parents and is difficult to place for adoption.
Qualified Expenses are those directly related to the legal adoption of a child and must be reasonable and necessary such as, adoption fees, court costs, attorney fees, travel (meals and lodging away from home) and may include some expenses before the child had been identified, such as the costs of a home study when you started the process.
Domestic or Foreign Adoptions. In most cases, you can claim the credit whether the adoption is domestic (child is a citizen or resident of the U.S. or its possessions) or foreign. However, the timing rules differ. (See: “Timing rules” below).
Income limits. The credit and exclusion are subject to income limitations. If your modified adjusted gross income exceeds $201,010, the benefit begins to be reduced.
Timing rules. When to take the credit is confusing, because the year expenses are incurred may not be the year allowed for deductions and the rules differ for domestic, foreign and special needs adoptions. Seek a knowledgeable tax professional for help.
Caution: Adoption tax benefits are not allowed for married filing separate. However, you may be able to amend your tax returns for any open years and take any qualifying credits or exclusions by using one of the other appropriate statuses.