Two tax benefits are available to adoptive parents.
If you paid qualifying adoption expenses in 2012, you might qualify for a credit of up to $12,650 for each child you adopted.
The credit amount depends on your income. The credit is reduced if your adjusted gross income (AGI) is more than $189,710 . The credit is eliminated if you earn more than $229,710 .
Adoption Benefits Exclusion
If your employer has an adoption assistance program, you can exclude up to $12,650 from your income in 2012. The income limits listed above apply to this tax benefit, too.
Your employer will report these benefits to you on your W-2, box 12 and mark it with the code “T.” You can claim both the credit and the exclusion for expenses related to adopting a child. However, you can't claim both for the same expenses.
If you're adopting a child with special needs and your employer has an adoption-assistance program, you might receive both benefits. In adoption cases, the state determines if the child you're adopting is a special-needs child.
If you're married filing separately, you can't claim the adoption credit or the adoption-benefits exclusion unless you meet all these requirements:
You lived apart from your spouse during the last 6 months of 2012.
Your adopted child lived in your home for more than half of 2012.
You provided more than half the cost of maintaining your home.
Qualifying Adoption Expenses
Qualifying expenses include:
Other adoption costs
For your expenses to qualify for either the adoption credit or the adoption benefits exclusion, all of these must apply:
The adopted child must be under age 18 or disabled.
You paid the expenses in 2012.
You can claim expenses paid before the year when the adoption became final in the year after they’re paid. However, you can deduct expenses for a special-needs or foreign adoption only if the adoption became final in 2012. Expenses for adopting your spouse's child don't qualify.
Year You Claim the Credit
If the adopted child is a U.S. citizen or resident, the year you claim the credit depends on a couple of factors. You must consider the year you pay the qualifying expenses and the finality of the adoption:
If you pay the expenses in a year before the adoption becomes final, you can claim the credit in the year after the year of payment. So, you can claim expenses paid in 2011 for the credit on your 2012 return if the adoption isn't yet final.
If you pay the expenses in the year the adoption becomes final, you can claim the credit for the year the adoption becomes final.
If you pay the expenses in a year after the adoption becomes final, you can claim the credit in the year you pay the expenses.
If the adopted child has special needs, you can claim the full amount of the credit and the exclusion. You can do this regardless of the actual amount of expenses incurred.
If the adopted child is from a foreign country, you might be able to claim the credit and / or exclusion. You can do so only if the adoption became final in 2012.
Claiming the Credit
To report your adoption expenses and claim the adoption credit or exclusion:
Use Form 8839
Attach the appropriate documentation
For adoptions in 2011 and 2010, you were required to submit documentation with Form 8839. For adoptions in 2012, this requirement no longer applies. However, it's still a good idea to have documentation supporting:
The amount of expenses you incurred
When the adoption became final
The documentation will help you in case you need to refer to your records at a later date.
Finality of Foreign Adoptions
The IRS provides safe harbors for determining the finality of foreign adoptions covered by the Hague Convention. The safe harbors apply to children adopted on or after the Hague Convention effective date for children who both:
Were habitually residents in a convention country
Moved, or will move, to the United States
Prospective adoptive parents must also have filed an Application for Determination of Suitability to Adopt a Child. The application must both:
Be from a Hague Convention country
Be filed with the Department of State on or after April 1, 2008
If you meet all requirements of the safe harbor, you can rely on the safe harbor when you assert that the adoption of the foreign child is finalized.
The IRS won’t challenge the finality of foreign adoptions finalized in a Hague Convention country other than the United States in the tax year that either:
The Hague Convention country enters a final decree of adoption
The secretary of state issues a Hague Adoption Certificate (IHAC)
When the foreign adoption is finalized in the United States, you shouldn't face an IRS challenge. The IRS won’t challenge the finality of the adoption in the year the state court entered a final decree of adoption. This is true if the child entered the country for the purpose of adoption subject to a Hague Custody Certificate (IHCC). However, this only applies in the year that a state court enters a final decree of adoption.
To learn more, see IRS Form 8839 instructions or IRS Publication 968: Tax Benefits for Adoption.