Topic 607 - Adoption Credit

You may be able to take a tax credit of up to $10,390 for qualifying expenses paid to adopt an eligible child (including a child with special needs). The adoption credit is an amount subtracted from your tax liability. Although the credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in 2004 for an adoption which became final in 2004, may be eligible to claim the credit on the 2004 return. The adoption credit is not available for any reimbursed expense. In addition to the credit, up to $10,390 paid or reimbursed through the year 2004 by your employer for qualifying adoption expenses may be excludable from your gross income.

For both the credit or the exclusion, qualifying 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 directly related to and for which the principal purpose 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. The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final. An eligible child is a child with special needs if he or she is a United States citizen or resident and a state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided.

The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit.

Under the dollar limit the amount of your adoption credit or exclusion is limited to $10,390 for each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar amount applies separately to each. For example, if you paid $9,000 in qualifying adoption expenses for a final adoption, and your employer paid $4,000 of additional qualifying adoption expenses, you may be able to claim a credit of up to $9,000 and also exclude up to $4,000.

The $10,390 amount is the maximum amount of qualifying expenses taken into account over all taxable years. Therefore, it must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort, including an unsuccessful effort to adopt a different child.

The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is $155,860 or less, the income limit will not affect your credit or exclusion. If your modified AGI is more than $155,860, your credit or exclusion will be reduced. If your modified AGI is $195,860 or more, your credit or exclusion will be eliminated.

Generally, if you are married, you must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements.

To take the credit or exclusion, complete Form 8839 (PDF), Qualified Adoption Expenses. You will attach Form 8839 to Form 1040 (PDF) or Form 1040A (PDF) and report the credit on line 53 of Form 1040 or line 34 of Form 1040A. Additional information on the adoption credit and exclusion can be found in Publication 968, Tax Benefits for Adoption. Employers should order Publication 968 to obtain information on setting up an adoption assistance program and information on how to report this benefit.